Parametric insurance, where policies pay out predefined amounts based on trigger events, is helping corporations around the world manage their catastrophe risks. While traditional insurance for vulnerable properties and assets often comes with large deductibles or lower-than-required limits and a lengthy claims process, parametric insurance opens up new capacity and pays quickly to cover immediate costs.

Because parametric pay-outs depend on trigger events rather than the exact loss a company experiences, it is important to structure a policy that will respond in the right way when a shock event happens. In the past, some organizations have purchased parametric policies that did not meet their expectations during a catastrophe. Companies that are considering taking advantage of the transparency, flexibility and speed of a parametric policy should make sure they consider these three aspects to ensure successful coverage: using an index that reflects the risk; setting the right trigger point; and choosing a data source that responds quickly.

When companies buy insurance products that turn out to be unsuitable and leave them on the hook to bear the costs of a catastrophic loss, neither they nor their insurers tend to reveal the details publicly. For this reason, the few examples of where parametric insurance didn’t deliver as expected that we discuss in this article come from the public sector.

1: Use an index that reflects the risk

The African Risk Capacity (ARC), a risk pool protecting African governments and populations against climate and catastrophic risks, provided parametric drought insurance to the government of Malawi from 2015 to 2016. A severe drought occurred during the policy period, but no immediate pay-out was triggered under the parametric policy.

ARC uses a risk model to determine when parametric pay-outs are due. It monitors precipitation, modeling how the timing, amount and distribution of rainfall will affect crop yields, to measure drought. Then it overlays the measure of drought onto a population vulnerability index to estimate the amount of people who would be affected by the drought and the cost to assist them.

In the 2015/16 policy year, many people in Malawi were affected by drought, but ARC’s model had calculated the impact to be much lower. After a review, it was discovered that the model relied on out-of-date information about what crops were being grown where. As a result, the coverage was adjusted and ARC made a pay-out of $8.1 million USD to Malawi’s government. ARC has continued to adjust its models since and increasing numbers of African countries are using its coverage to fund relief efforts after droughts, cyclones and other catastrophes.

Whatever the peril, it is important to make sure that a parametric policy’s index – the measure of the event which the policy offers protection for – accurately represents the on-the-ground impact of a catastrophe.

2: Set the right trigger point

The World Bank purchased a parametric catastrophe bond in 2017 covering pandemic risks. The bond was intended to help the World Bank’s then-newly-created Pandemic Emergency Financing Facility (PEF) direct hundreds of millions of dollars in funding to developing countries rapidly when they were at risk of a spreading pandemic.

This bond was criticized in the early onset of the COVID-19 pandemic in 2020. The bond’s trigger relied on any pandemic meeting certain thresholds of cases and deaths globally and across several countries, as well as a growth rate in cases calculated to be ‘exponential’ in selected countries.

These thresholds were not met until 31 March 2020 and that was first confirmed on 17 April, with the first pay-outs being disbursed to governments in May. By that time, there were already over 3 million cases of COVID-19 confirmed across 215 countries and territories. Vulnerable countries could have benefited from earlier funding to put preventative measures in place to limit the spread. The World Bank later decided not to pursue future efforts for pandemic risk transfer.

Whatever the catastrophe that parametric insurance is protecting against, it is important to set the right trigger point. Otherwise, organizations risk being caught out, like vulnerable countries in early 2020 with COVID-19, when a catastrophe hits that does not quite meet the required thresholds for a pay-out but causes a large loss.

3: Chose a data source that responds quickly

The government of the Philippines purchased a parametric catastrophe bond in 2019 for $225 million of protection against earthquake and tropical cyclone risks. In mid-December 2021, Typhoon Rai (known in the Philippines as Typhoon Odette), caused 410 deaths and $1 billion in economic losses, according to Aon.

It was not until over a month later, on 24 January 2022, that the bond’s calculation agent was able to confirm that the thresholds for a pay-out had been met and that funds could begin to be disbursed. The final calculation process relied on even more data and the final amount that would be paid was not finalized until mid-May. When its catastrophe bond coverage expired, the Philippines government decided not to renew it, choosing traditional, indemnity-based insurance over parametric.

Almost immediately after a catastrophic event, organizations face disruption to normal operations and begin to incur emergency expenses. Parametric policies are ideal to cover immediate costs, but uncertainty about how much will be paid and delays in receiving funds hamper organizations’ ability to make decisions.

Most parametric policies will provide assurances that pay-outs will be settled within around a month. Some have been known to pay out just hours after an event. The time between an event and a pay-out depends on the data sources used and the calculation agent: it is important to choose a data source that will respond quickly.

How to build resilient triggers for parametric earthquake insurance

More corporations than ever are turning to parametric insurance to cover earthquake risks, driven by high deductibles, exclusions and slow claims payments from traditional insurance. But it is only when an earthquake hits that their coverage will be tested. With parametric insurance, it is vital that companies use an index that truly reflects their risk, set the right trigger point and choose a data source that responds quickly.

Safehub, whose compact sensors are being used for earthquake risk management by large corporations around the world, is now providing its technology to provide asset-specific earthquake data for parametric insurance in partnership with Liberty Mutual Reinsurance.

This means the index that a parametric policy relies on reflects more precisely how an insured building or asset is affected by an earthquake. Safehub’s data can help corporations set trigger points where they expect to experience a loss. The data is reported quickly, with alerts within minutes helping organizations respond and enabling insurers to calculate and disburse a pay-out within a short period.

Learn more at safehub.io/earthquake-response/parametric-insurance/.

Many organizations have large earthquake exposures where traditional insurance falls short. Key losses are excluded, deductibles are high and claims take months or years to settle. In the last five years, more companies have turned to parametric insurance for tricky catastrophe risks. But how can you ensure the payout accurately reflects how a building was affected by an earthquake?

Earlier in 2024, Safehub, Liberty Mutual Reinsurance and MGA XS Global participated in a webinar hosted by InsTech to discuss sensors and parametric insurance for earthquake risks. This article reflects on that webinar a few months later, following several large global earthquakes: the April M7.5 earthquake in Taiwan that Safehub’s sensors have been used to collect data for, as well as an exclusive partnership announcement between Safehub and Liberty Mutual Re, expanding its solution globally.

Responding to recent earthquakes

Safehub’s sensor technology is installed in buildings across earthquake-prone areas around the world. It measured two significant earthquakes surrounding the time of the last webinar: a 5.8 magnitude event on 7 December 2023 in Mexico City and a 7.6 magnitude event in Ishikawa, central Japan, on New Year’s Day 2024.

“Our clients who had buildings in the Tokyo area received alerts to say that their buildings were shaken, but unaffected. This allowed them to continue business operations with confidence.” – Andy Thompson, CEO and Co-founder, Safehub

Since then, Taiwan was rocked with a similar M7.5 earthquake in April. However, unlike the quake in Japan, Safehub sensors helped their clients in the area in a different way. Safehub sensors collected data from buildings in the area and determined a potential for damage in some client buildings. This enabled them to prioritize emergency response for those sites, while allowing them to resume business in the others.

Prior to the webinar, Safehub also launched an earthquake parametric insurance treaty with XS Global in Mexico City, which was put to the test for the first time. Safehub provided an incident report to XS Global and Liberty Mutual Re shortly after an earthquake on 7 December. It was the first incident report tied to a sensor-triggered policy that was delivered after an earthquake. The shaking was not sufficient to trigger any pay-outs and there were no damages reported.

“For our clients who have operations, retail stores or facilities in Mexico City, often with hundreds of people, the ability to have information [about how the earthquake affected their premises] immediately was a pleasant surprise.” – Alejandro Solorzano, Head of Alternative Risk Transfer and Innovation, XS Global

Since then, Safehub and Liberty Mutual Reinsurance have announced an exclusive partnership. It allows global organizations access to a parametric insurance product that pays out automatically when the shaking measured by a sensor at their location exceeds a certain threshold.

The problems parametric insurance is solving

InsTech ran a poll to research the challenges in the earthquake insurance market. It found that slow claims payments was one of the biggest problems, followed by high deductibles and exclusions.

Deductibles, exclusions and delays in claims payments mean that many organizations are more exposed to earthquakes than they would like to be.

“In lots of countries sensitive to earthquakes, particularly Mexico, most large corporations are lacking in coverage. Due to large deductibles, in recent earthquakes in Mexico, the total insurance pay-out was small… We have also seen in recent events such as the 2021 Acapulco earthquake that there are not enough loss adjusters on the ground to assess claims, causing a delay in payment.” – Jean-Christophe Garaix, Head of Agriculture and Parametrics, Liberty Mutual Reinsurance

While insurance traditionally pays claims based on an assessment of loss, parametric insurance pays out predefined amounts based on event triggers, usually weather or catastrophic events. This means pay-outs can occur more quickly, and parametric pay-outs can be used for almost any purpose, such as emergency expenses, costs in a traditional insurance deductible or business interruption.

“In our experience with parametric earthquake and hurricane policies, the loss report is completed within 24 hours. At that point the insurance company and the client know exactly what the pay-out will be. The client needs to confirm to the insurer that they experienced a loss. Then the payment can be done quickly, with money received in the client’s bank account within seven days.” – Alejandro Solorzano, Head of Alternative Risk Transfer and Innovation, XS Global

Measuring earthquakes for parametric insurance

Parametric earthquake insurance has existed for more than two decades. Usually the data that triggers a pay-out relates to either the magnitude of the earthquake and the insured assets distance from the epicenter, or an estimate of the shaking at the insured location from a public agency such as the US Geological Survey.

Measurements such as magnitude and shaking estimates are useful for measuring the overall impact of an earthquake over a broad area. When it comes to how an individual asset or building is affected by an earthquake, these measurements fall short; even buildings that are on the same street may shake differently depending on their structure and the materials in the ground beneath them.

Sensors from Safehub provide the most asset-specific information about earthquakes. The partnership with Liberty Mutual Reinsurance means that companies can now have parametric insurance policies that pay out based on measurements from a sensor on their building. This results in more precise pay-outs and minimal basis risk.

“There are different tools suited for different jobs. Cat-in-a-circle [where pay-outs are based on magnitude and distance from epicenter] and ShakeMap can be the right parametric trigger for certain situations. But if an organization’s concern is building-specific, using building-specific data matters. We can measure it.” – Andy Thompson, CEO and Co-founder, Safehub

Sensor-based insurance gains momentum

The panel discussed the increasing interest that corporations and brokers are showing in the sensor-powered parametric earthquake insurance product. Alejandro described how data from sensors helps brokers give their clients certainty after an event: if the ground shaking measured by the sensor is not significant, there is unlikely to be much damage or insurance pay-out. If the ground shaking is significant and the parametric policy is triggered, the client is more likely to expect a pay-out from its property insurance as well.

“We started with a pilot in Mexico, because we see Mexico as the most complicated area for earthquake assessment. Now we offer coverage worldwide. We are looking for local distribution networks to reach new clients. Our approach is not to compete with traditional insurance: we see parametric mainly for filling gaps in coverage such as business interruption and offering fast payments.” – Jean-Christophe Garaix, Head of Agriculture and Parametrics, Liberty Mutual Reinsurance
Learn more at safehub.io/earthquake-response/parametric-insurance/.

In our latest installment of the Safehub Resilience Network webinar series, “Can Building Shaking Sensors Prevent Future Tragedies?,” Safehub led a discussion about how to reduce uncertainty in estimating building vulnerability after an earthquake. We welcomed two guest speakers from the Global Earthquake Model (GEM) Foundation, a global public-private partnership organization that is improving the state of practice of earthquake hazard and risk assessment through the development of open global databases, models, and tools—and improving stakeholder capacity for risk assessment. 

Among the many initiatives at GEM are global hazard, risk maps, and other tools designed to help organizations inform their own understanding of earthquake hazard and risk. OpenQuake, GEM’s flagship product, is an open seismic hazard and risk analysis platform for development of Global Earthquake Hazard and Risk maps that provide the public with data on earthquake hazard and risk around the world.

John Schneider, GEM’s secretary general, discussed many of the ways that the work of his organization and Safehub are complementary. For example, GEM models can be used to estimate the potential for damage, while the Safehub catastrophe risk management solution can be used to significantly improve the models and impact estimates.

Building IoT Sensors Can Reduce Damage Error Estimates by 60 Percent

“We have been relying on earthquake magnitude and distance from the epicenter as one of the main data sources for post-earthquake decision-making for far too long. Now, thanks to new building-specific sensor solutions that can provide sensor and elongation data about damage to buildings that could not otherwise be detected, we can make more informed decisions.”

Vitor Silva, GEM’s seismic risk coordinator

Integrating building sensors can support the dynamic characterization of buildings and improve the selection or derivation of vulnerability models. Following destructive events, ground shaking or dynamic data provided by sensors can significantly reduce the bias and estimation of error by more than 60 percent. In fact, recent studies covering building damage from Spain show that, in some instances, minor damage cannot be detected in buildings without sensors. For building portfolios, the integration of sensors like Safehub’s in even a few buildings can dramatically improve the ability to assess potential losses.

According to Silva, the importance of incorporating building sensors cannot be overemphasized. During the webinar, Silva provided illustrations of massive losses that have been incurred across the globe from past earthquake events. One important example near Christchurch, New Zealand, demonstrated how, even after a post-earthquake inspection, a building still collapsed and more than 100 people that reoccupied it were killed.

Silva points out that there may have been some damage to the building that could not have been visible during the inspection. For example, some structural damage could be hidden behind nonstructural elements. Sensor data indicating clear changes in the dynamic properties of the building could possibly have supported the decisions of engineers and decision-makers about the need for a more detailed inspection of the building.

Safehub’s Mission: Reducing Error and Increasing Safety After an Earthquake

Safehub’s partnership with GEM is just one example of our mission to help make the world safer and more resilient from natural disasters by connecting building-specific risk information with portfolio-level decision-making. That means connecting the risk and damage of the building at the asset level and aggregating that at a portfolio level so that critical decisions around safety, crisis management, business continuity, and even insurance, can be made.

Today, Safehub is enabling organizations across the globe to reduce potential error in decision-making following an earthquake with a low-cost sensor solution they can easily install in all their buildings.

Get more information from the experts by watching the recording here:

The Future of Catastrophe Risk Management: Reducing Uncertainty After an Earthquake