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WHY EVERY COMPANY SHOULD HAVE A PARAMETRIC POLICY 

Parametric insurance offers protection in unpredictable scenarios where
traditional policies cannot.  
By: Katie Dwyer | July 12, 2023
Topics: Catastrophe | Claims | Climate Change | Crisis Management | Critical
Risks | Property



According to the World Bank, the earthquake that shook Turkey back in February
caused direct physical damage worth $34 billion.

The Turkish Enterprise and Business Confederation, however, estimates the
quake’s total economic impact will reach roughly $84.1 billion, including loss
of productivity and national income.  



“Earthquakes can have a devastating impact, not only on the built environment
but on the long-term economic recovery of an area. The aftermath can last
months, if not years,” said Megan Linkin, Swiss Re’s senior parametric Nat CAT
structurer for North America. 

The Turkey quake demonstrates just how far-reaching the effects of natural
disasters can be in a global economy.

Because of potential disruptions to manufacturing, shipping and other commercial
activities, even entities thousands of miles away are not safe from an
earthquake’s damage to their bottom lines.  

“Look at the Pacific Northwest and British Columbia, where we haven’t seen a
major earthquake strike since the 1700s. Today, they are home to the commercial
hubs of Portland, Seattle and Vancouver,” Linkin said.  



“Another example would be New Madrid, which hasn’t seen a quake since the early
1800s; that region encompasses Memphis, which is a major hub for UPS. If these
hubs of commerce were destroyed or made inaccessible by an earthquake, every
link in the supply chain would feel the tremor, and their infrastructure has not
been tested by an earthquake in some time.” 

The increasing interconnectedness of risk combined with unpredictability of
natural disasters means that coverage gaps between traditional insurance
policies are inevitable when catastrophes do strike.

Youssef Baki, parametric structurer for North America, Swiss Re Corporate
Solutions

This is where parametric solutions come into play, offering three key benefits. 


1) TRANSPARENCY 

Parametric insurance uses the characteristics of the underlying event that
caused the loss to determine the proceeds that are due, instead of using the
actual loss incurred. 

An earthquake, for example, would have to meet magnitude and location criterion
as defined by the policy to trigger a payout, regardless of whether it caused
any physical damage to the insured’s property.  

“We use site specific ground shaking as reported by the USGS or another
independent seismic agency that produces ground-shaking maps at the insured
location,” said Swiss Re’s Youssef Baki, parametric structurer for North
America.  

The objectivity of seismic data and geometric coordinates makes the settlement
process extremely transparent. Because the payout is not tied to the loss, there
is no loss adjusting process.

If the criteria are met, an event report is generated, and a payment is sent.
There is little room for disputing policy terms. 


2) SPEED 

Transparent policies and elimination of loss adjustment beget speedy claim
payments.  

“For all of our parametric policies in North America, whether for earthquake,
hurricane or hail, every single claim has been paid in less than 30 days,” Baki
said.  



Faster payments mean companies can rebuild faster, minimize business
interruption and resume normal operations as quickly as possible, avoiding the
stress of a protracted claim adjusting process.  


3) FLEXIBILITY 

Because payments are not tied to loss amounts, they can be applied in almost any
way that helps an insured get back on their feet.

Funds may go toward repairing physical damage, but they could also be used to
backfill a high deductible or fill in holes in the balance sheet while
operations are disrupted.  

The covered assets also do not necessarily have to be where the insured is
located. The insured simply needs to demonstrate a vested financial interest in
the asset. 

“A client may, for example, utilize a warehouse to store goods as they arrive
into the port of Los Angeles. They don’t own the warehouse, but if a quake were
to damage that structure, the company will have to re-route its goods, which
will likely get caught in a backlog as everyone else has to re-route their
shipments too,” Baki said.

Megan Linkin, senior parametric Nat CAT structurer for North America, Swiss Re
Corporate Solutions

“That client can define a location in their parametric policy that encompasses
that warehouse, even though it isn’t their asset, so that any event affecting
that property gives them a payout. The client can then use those funds to
address supply chain disruption.” 


WHO BENEFITS MOST FROM PARAMETRIC POLICIES? 

Swiss Re has been in the parametric space for just over 20 years and has seen
applications of parametric insurance expand and interest from all sectors of the
economy grow. 

Initially, the primary buyers of parametric products were public entities.  

“Governments were interested because they were sort of the insurers of last
resort and the first responders as well. Just after an event, they needed cash
fast to address a variety of challenges – emergency infrastructure repair,
overtime salaries, humanitarian crises, etc.,” Linkin said.  

“But as the economy has become more and more globalized, with increased
interconnectedness and interdependencies between different locations across the
globe, there has been increased interest from commercial buyers as well. In the
past five to seven years, growth in the parametric space has been
exponential.”  



Much of that growth comes from the construction industry, which often has
complex risks to cover.

Parametric policies can complement a traditional builder’s risk policy, covering
costs associated with construction delays, increased cost of materials
post-event, or any type of disruption and extra expenses resulting from an
earthquake, hurricane or hail event. 

“We’ve also found a niche for these policies within the construction space in
part because we can write on a multi-year basis to match the term of the
construction project,” Baki said.

“We see many insureds buy these policies to complement or fill in the gaps in
traditional coverage.” 

This of course is not limited to construction. The hospitality, retail and
energy sectors, among others, can benefit from parametric policies as a bespoke
contingent business interruption cover.  

“There’s definitely not a single characteristic of a parametric buyer anymore
because the use of the funds is so broad, it appeals to a broad swath of the
economy,” Linkin said.  

“Almost all commercial entities can benefit from parametric policies to protect
against the unpredictable.” & 

Katie Dwyer is a freelance editor and writer based out of Philadelphia. She can
be reached at riskletters@theinstitutes.org.





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SPONSORED: PHILADELPHIA INSURANCE COMPANIES



HOW A CARRIER PARTNER CAN HELP NAVIGATE A CHALLENGING MANAGEMENT AND
PROFESSIONAL LIABILITY MARKET

A combination of a choppy economy with increased claims frequency and severity
could lead to rate increases in the Management & Professional Liability market.
By: Risk & Insurance | April 3, 2024

Rates in the management & professional liability (M&PL) markets were on the rise
from 2020 to early 2023 and are now falling rapidly.

M&PL divisions manage a number of different insurance products including
management liability (D&O), professional liability (E&O), employment practices
liability (EPL), fiduciary liability policies, cyber, etc. In 2023 and into
2024, a big influence on the marketplace has been the extremely aggressive and
softening public company D&O market.

Though these rates have been softening for management liability, that may change
over the next few years as companies continue to adjust their business models
motivated by economic uncertainty. Layoffs were up nearly 200% last year, Forbes
reported, even as other recession indicators, like the inflation rate, improved.
A recession could lead to an increased claim activity and force carriers to
raise rates.

“Whenever there is a meaningful downturn in the economy, we tend to see claim
frequency pop up,” said George Schalick, Jr., senior vice president of the
Management and Professional Liability Division at Philadelphia Insurance
Companies (PHLY).

With continued fiscal uncertainty, businesses potentially already burdened with
pandemic-related claims should seek a carrier with a long history in M&PL
products. They will provide much-needed risk management guidance and be better
positioned to support their insureds during market fluctuations.


WHY INSUREDS MIGHT SEE AN UPTICK IN M&PL CLAIMS

George Schalick, Jr., Senior Vice President of the Management and Professional
Liability Division, Philadelphia Insurance Companies

The current soft market might come as a bit of a surprise as it does not track
with previous underwriting cycles and economic conditions. Afterall, many
privately held and non-profit organizations struggled during the early days of
the pandemic with shutdowns and rapidly declining revenues.  But the Government
assistance programs, like the Paycheck Protection Program loans, helped keep
many afloat during the tough times.

“During COVID many organizations stopped doing business until they were able to
sort out all of the health and safety challenges,” Schalick said. “They were
forced to lock down, but then all the government assistance programs allowed
them to keep people employed. The increased volume of claims we anticipated we
would see coming from the lockdowns and restrictions that were imposed upon
businesses in the U.S. didn’t manifest at first.”

“Just because there wasn’t an onslaught of reported claims at the beginning of
the pandemic, doesn’t mean the circumstances that would give rise to a claim
being reported didn’t occur. Courts and the judicial system were closed or
slowed and now that they are back open, we’re starting to see the circumstances
that occurred during the COVID lockdowns becoming claims today,” Schalick said.
“Litigation is progressing.”

Added to the delayed pandemic litigation is a concern over newer claims that
might be filed as the country inches toward an economic downturn. Though a
recession was avoided in 2023, experts think a soft dip could occur in 2024,
with 76% of economists saying there’s a 50% or less chance of an economic
downturn this year — that almost always results in more management liability
claims.

“During the Great Recession in 2008, we saw an almost immediate spike in claims
because of the economic conditions and the pressure it placed on organizations.
They were making personnel changes with significant belt tightening almost
immediately.” Schalick said.


WHAT’S IN STORE FOR M&PL POLICY RATES IN 2024?

Despite an uptick in claims and increased economic uncertainty, management
liability rates haven’t increased, resulting in market-wide pricing levels that
may not meet the increased pressure of rising settlements and jury verdicts.

“Rates are going the other direction and settlement values are not falling,”
Schalick said.

The mismatch between rates, claim frequency and severity is, in part, because
carriers experiencing the dramatic soft market in the public D&O market are
seeking premium gain in the private and non-profit market.

“In the public company market, the rates have been decreasing significantly. The
rates were increasing in the private, not-for-profit market, and rightfully so,
but there’s a desire to supplement overall mid-size D&O for carriers who also
write private not-for-profit, and they see that as an opportunity to aggregate
premium,” Schalick said. “So the always competitive landscape in the private,
not-for-profit market has dramatically increased in the last 18 to 24 months.”

Still, companies of all sizes and types should be concerned about management
liability rates in the future. Legal system abuse is resulting in increases in
both the amount of litigation and the size of verdicts plaintiffs are receiving.

Certain areas of the country are particularly vulnerable to this type of legal
system abuse. As a result, insureds in these localities are likely to be
vulnerable to rate increases.

“The environment is so positive for the plaintiff that forces premium increases
so carriers are able to stay in that market long term,” Schalick said.


WHY A TENURED CARRIER PARTNER CAN HELP INSUREDS NAVIGATE AN UNCERTAIN MARKET

It’s clear that insureds are facing an uncertain M&PL market over the next few
years. Fortunately, carriers with a long history in the M&PL space will be there
to offer stability.

Philadelphia Insurance Companies has been supporting this market for 35 years.
PHLY is committed to offering long-term rate stability, even as economic and
claims trends start to push premiums upwards. They have an appetite for all
sorts of companies, large and small, for-profit and nonprofit alike.

“We’ve been at this game for a long time and are one of the most tenured
underwriters in this space,” Schalick said. “We like to stay very consistent.”

 PHLY has worked with both for-profit and non-profit on management liability
policies. With dedicated M&PL teams throughout the company’s 13 regions, PHLY
provides the support agents and brokers are looking for on behalf of their
clients. The teams know their regions well and can respond to local trends.
They’re also dedicated to making the renewal process as easy as possible for
their partners and policyholders.

“We have real confidence in our results, so we focus a lot on making the renewal
experience as painless as possible for all agents and insureds,” Schalick said.

The company is also investing in tools to help insureds avoid losses. Earlier
this year, they launched a new online risk management platform, PHLYGateway,
which offers resources for insureds on how to create an employee handbook and
trainings on issues such as recognizing workplace sexual harassment and
discrimination.

If insureds have questions, they can consult a Best Practices Help Line,
provided via the platform. That way, they can get on the spot risk management
guidance to help them prevent claims.

To learn more, visit:
https://www.phly.com/mplDivision/managementLiability/default.aspx.


 



This article was produced by the R&I Brand Studio, a unit of the advertising
department of Risk & Insurance, in collaboration with Philadelphia Insurance
Companies. The editorial staff of Risk & Insurance had no role in its
preparation.















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