By Christopher Flavelle and Katherine Chiglinsky, with assistance by Hannah Recht and Brian K Sullivan
Some of the world’s largest insurers are eagerly pitching cities, states and even school districts on policies designed to pay out quickly with few questions in the event of extreme weather. The catch: Even a hurricane might not be extreme enough.
It’s called parametric insurance, and it aims to provide a quick-cash payout within days after a storm hits, beating federal disaster aid to the punch with no restrictions on the money’s use. Among the recent clients of reinsurer Swiss Re AG are Louisiana, one of the most hurricane-prone states, and the Miami-Dade County school board.
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Parametric policies offer insurers a way to cover risks without the messy complications of sending in a flood of adjusters to assess the damage after a catastrophe. Coupled with the speed of payment that insurers say they can provide with those policies, that could ease the post-crisis burden for both sellers and buyers.
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Parametric policies create "what insurance nerds call basis risk,’’ said David Eckles, a professor of risk management and insurance at the University of Georgia’s Terry College of Business. Basis risk refers to the mismatch between the policy’s parameters and the actual event, such as a storm where the damage inflicts a loss on the insured party but doesn’t trigger the precise measurements to generate a payout.
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