To many of
us, after decades of experience in Insurance, still the insuring terms and
conditions are not fully understood. Mostly it is Automobiles (Motor)
insurance, Health policies and a bit of Property and little of Liability
Insurance. Insurance protects policy
holders and pays for loss or damage to insured property during the policy
period, caused by insued perils. Insurers would often say – Insurers must
understand the risk before underwriting and to be eligible for underwriting,
the risk should be exposed to a peril but the result should be uncertain, loss
should be ascertainable in monetary terms and should be homogenous for the Underwriter
to apply term and more importantly the rate – if yes, how would a new risk like
‘a rocket launch’ would be underwritten !
Insurance
Policies indemnify ie., place the insured in the position, they were prior to
the occurrence by monetary payment of the extent of damages but would a Policy
respond to a situation prior to a loss, ie., in preventing a loss ! – loss minimization
charges are payable yet !! .. .. … Parametric
insurance is a type of insurance that does not indemnify the pure loss, but ex-ante
agrees to make a payment upon the occurrence of a triggering event. The
triggering event is often a catastrophic natural event which may ordinarily
precipitate a loss or a series of losses. These insurance principles are applied to agricultural crop insurance and
other normal risks not of the nature of disaster, if the outcome of the risk is
correlated to a parameter or an index of parameters. Perplexing to say the least.
The Mesoamerican Barrier
Reef System (MBRS), also popularly known as the Great Mayan Reef, is a marine region that stretches over 1,000
kilometres (620 mi) from Isla Contoy at the tip of the Yucatán Peninsula down
to Belize, Guatemala and the Bay Islands of Honduras. The marine
barrier is home to more than 500 fish
species, 60 coral species, 350 mollusks and
marine mammals, algaes and seagrasses. Critically endangered species like
- saltwater crocodile; green, hawksbill and loggerhead sea
turtles; Nassau and goliath grouper; manatees; all live here besides the largest
aggregation of whale sharks in the world.
An estimated 2 million people are woven into the very fabric of the
MAR’s rich coastal environments and count on healthy ecosystems here for their
food, water and livelihoods.
Salinity, storm waves, and
oxygen-poor mud discourage understory growth in the mangroves. Mesoamerican mangroves form multiple lines of
defense for the reef system. The first line is the tall mangrove forest along
the coast and up the mouths of tidal rivers. The second line, and sometimes a
third and fourth, occur offshore, in places where pointy mangrove seedlings
have taken root atop a series of shallow marine ridges. Each clump slowly
gathers the makings of an islet under itself. These islets grow into
islands—mangrove cays—arranged in linear archipelagoes. The clusters of cays
work as screens, benefiting the sea grass by moderating wave action and the
coral reef by intercepting silt, fertilizers, and toxins in runoff from land. The
mangroves, in addition to defense, provide mulch. They can shed tons of leaves
per acre every year. Fungi and bacteria break down this leaf litter and consume
it, then are consumed by tiny worms and crustaceans, which in turn feed small
fish, which feed larger fish and birds and crocodiles.
Alongside the ongoing
pandemic, the upcoming renewals, pricing, and alternative reinsurance capital, reinsurer’s are clamouring for innovative use of technology as it looks
to help narrow the protection gap in both emerging and developed markets. Reinsurers like SwissRe have made strides in
areas like U.S. flood space, aided by technologies such
as satellite imagery, alongside its support for the development of a parametric
insurance solution designed to help the conservation of the Mesoamerican Reef
in Mexico. Global reinsurance giant Swiss Re has supported the development of
an innovative new parametric insurance solution designed to help the
conservation of the Mesoamerican Reef, which includes protecting the coral reef
and beach sand against the impacts of major hurricanes.
The innovative insurance
solution was announced at the 2018 World Ocean Summit
in Mexico, designed to protect the longest barrier reef in the Western
Hemisphere, the Mesoamerican Reef, which protects the most important tourism
hub in Mexico, the Riviera Maya, and which is home to some of the planet’s most
unique and important coral reefs. At the
2018 World Ocean Summit, the Nature Conservancy and the state government of
Quintana Roo in Mexico, announced the establishment of a ‘Coastal Zone
Management Trust’, which will cover a portion of the Mesoamerican Reef along
Mexico’s Yucatan Peninsula, and which is designed to promote the conservation
of coastal regions across the Mexican Caribbean. The Trust will also finance what will become the world’s first
parametric insurance products for covering a coral reef and beach sand against
the impacts of hurricanes.
This insurance-for-nature
approach is a promising example of creative financing to address imminent
challenges facing marine ecosystems, both in Mexico and around the world. The Riviera Maya receives over 10 million
tourists each year, and generates US $10 billion annually. Swiss Re explains
that funds for both the trust and subsequent insurance premiums will be
collected as a slice of the tourism taxes and other government resources. Swiss
Re explains that a healthy coral reef can lower the economic losses caused by
hurricanes and storms by as much as 26%. And while coral cover is also eroded
by disease, bleaching events, diminishing herbivores, and algae overgrowth,
reefs can lose between 20% and 60% of live coral cover following a Category 4
or 5 storm.
Parametric reef insurance
is an innovative financial mechanism that will cover the costs of rapid
response actions to identify and address damage to reefs after the impact of a
hurricane.Traditional insurance covers against a risk, and in the event that it
materializes, a damage assessment is carried out and then a payment is granted.
Parametric insurance is built under previously analyzed technical parameters,
such as the type of event, the level of damage and the characteristics that can
generate a negative or catastrophic impact. Two parties take part in parametric reef
insurance: The entity or custodian of the reefs exposed to the risk of a
catastrophic event, in this case a hurricane as it’s defined in the design of
the insurance; and the insurance company. Those parties then agree upon the
characteristics/parameters of the hurricane or climatic phenomenon that will
trigger the insurance payment. If, during the validity of the parametric
insurance, a natural phenomenon occurs, the fulfillment of the parameters would be verified to make the insurance payment. Verification of compliance with the
parameter(s) established in the policy will be carried out by an independent
third party, such as the National Hurricane Center, a division of the Tropical
Prediction Center of the National Weather Service of the United States. The parameters of the sites to be insured
along the MAR are currently being evaluated. Tentatively, it could be
determined that a hurricane with a speed starting at 64 knots -equivalent to
118,528 kilometers per hour - be one of the insurance parameters.
The payout will increase
up to the annual aggregate limit over the 12-month policy depending on the wind
speed: 110 knots or more will trigger a payout of 40% of the maximum limit, 130
or more will trigger an 80% payout while 160 knots or more will trigger a full
limit payout. Depending on the severity
of storms, “the insurance policy would pay out up to that limit and if that
limit is not met on the first storm, the second storm would still be eligible
for a payout up to that limit,”
Interesting ! ~
though the concept in its entirety is not understood by minds which are tuned
to calculating indemnity on the extent of loss, further adjusted by
depreciation, salvage, adequacy of insurance and policy excess.
With regards – S.
Sampathkumar
26.09.2020
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