Parametric (NatCat) Products Quelle: Verwendung unter Lizenz von Shutterstock.com Parametric (NatCat) Products Andi Vossberg 4th October 2018

Agenda What is a parametric trigger and how does a parametric trigger product work? Potential buyers of parametric trigger products

What is a parametric trigger and how does a parametric trigger product work? Basics „Smart trigger“ „Pay now, argue later-policies“ traditional indemnity (re)insurance: parametric (re)insurance: covering a policyholder's actual losses pays out in response to defined triggers Parametric solutions are increasingly being deployed in the public sector and developing markets, as well as by corporate clients

What is a parametric trigger and how does a parametric trigger product work? Advantages / Motivation ? Quantification of traditional exposure is time-consuming and expensive Quick post-event liquidity for rapid repair programmes Parametric solutions can also cover risks which are excluded from traditional insurance Coverage of secondary losses (e.g., disruption of services, clean-up costs, overtime expenses, etc.) An alternative/add-on to traditional products, not a substitute!!

What is a parametric trigger and how does a parametric trigger product work? Example of a parametric product

Parametric trigger  “Cat(astrophe) in a box”

Parametric trigger  “ ” Basic Principle Definition of a geographic „box“ (Circle, rectangle, coastline, point …) Definition of a parametric trigger Gust, wind speed, magnitude, precipitation,… Correlating to risk location Easy data acquisition Modelling of return periods for a certain event occurring „in the box“ „All kind of losses” can be covered

Parametric trigger  “ ”-Peru Pisco - Peru Date: August 15, 2007 Magnitude: Mw 7.9 Fault-plane: red oval Huge damages in the Ica region Box Cat-in-a-Box (red rectangle): Payout is only based on the magnitude and the location of the epicenter (yellow star) The energy release of an EQ is the same along the fault plane (red and blue oval) In case of a fault lane towards NW (blue oval) Lima would have suffered huge losses but no payout

Covered event payout percentage How does it work Pay-out Epicenter of triggering earthquake has to be located within the box Moment magnitude of triggering earthquake has to be equal to or exceed 6.1 Payout can be structured uniquely in accordance with clients’ needs and price expectations, e.g. step-wise payout depending on magnitude: Each payout is provided immediately after receipt of an event notice and the preliminary loss estimate Threshold Covered event payout percentage 6.1 Mw 30% 6.5 Mw 60% 7.0 Mw 100%

How does it work Proof of loss Insured has to deliver an ultimate proof of loss within one year Proof of loss will cover all costs arising from real and personal property (including improvements and betterments) within the coverage region, including but not limited to property owned, used or intended for use by the client financial damage due to BI, any soft costs, any extra expenses Regulator approval to be classified as insurance product

Challenges Basis risk / Lower price correlates with higher basis risk !!  Risk that a policyholder may not recover their true losses from a disaster Basis risk should be low and well balanced  in general trigger products are not suitable to cover all losses/damages Payment should be correlated with the degree of damage Precise definition of the trigger, to avoid anti-selection and “moral hazard”

OneQuake Example I: Earthquake near Antalya airport 1. Scenario: EQ near AYT, impacting the airport severely 2. Two circles: Inner radius: 30km, magnitude: Mw 6.0 (max depth 40km) Outer radius: 60km, magnitude: Mw 6.7 (max depth 80km) 3. Payout pattern: Trigger level I: 100% Trigger level II: 60% …of limit of US$ 10m 4. Expected annual loss: 0.24%  Basis for pricing

OneQuake Example II: Earthquake Istanbul 1. Scenario: EQ near Istanbul 2. Two circles: Inner radius: 30km, magnitude: Mw 6.0 (max depth 40km) Outer radius: 60km, magnitude: Mw 6.7 (max depth 80km) 3. Payout pattern: Trigger level I: 100% Trigger level II: 60% …of limit of US$ 10m 4. Expected annual loss: 1.52%  Basis for pricing

OneQuake Example II: Earthquake near Istanbul 1. Scenario: EQ near Istanbul 2. Two circles: Inner radius: 30km, magnitude: Mw 6.0 (max depth 40km) Outer radius: 60km, magnitude: Mw 6.7 (max depth 80km) 3. Payout pattern: Trigger level I: 100% Trigger level II: 60% …of limit of US$ 10m 4. Expected annual loss: 1.52%  Basis for pricing

Potential buyers of parametric trigger products Municipalities/State – to cover infrastructure projects Banks Tourist industry To cover non physical damage losses To protect deductible … Where do you see potential for parametric trigger products?

Andi Vossberg 4th October 2018 Quelle: Verwendung unter Lizenz von Shutterstock.com Çok teşekkür ederim Andi Vossberg 4th October 2018