Trigger failures: can they be prevented?
“It is better to pay a little more up front than all the costs associated with litigation around a claim.”
Thomas Johansmeyer, ISO Claims Analytics
Unreliable government-provided data could undermine confidence in parametric insurance products and ILS, Thomas Johansmeyer of ISO Claims Analytics tells Bermuda:Re+ILS.
Businesses certainly need pandemic coverage of some description, for things such as paying employees and dealing with spoilage while a business is out of operation, and parametric products look well-suited to insuring this kind of risks, but unreliable government-provided data could undermine confidence in parametric insurance products and insurance-linked securities (ILS).
That is the message from Thomas Johansmeyer, assistant vice president of PCS strategy and development at ISO Claims Analytics, a division of Verisk.
“Parametric insurance makes a lot of sense as a way to underwrite risk transfer for pandemics where that risk is not included in other commercial coverages, such as business interruption,” Johansmeyer said.
“These products are definitely needed. But these risks tend to be very complex and it can be hard to measure things such as lost earnings due to a pandemic.”
Parametric insurance has been marketed as a no-nonsense product that removes the possibility of disputes between claimants and insurers by using pre-agreed triggers that leave no room for uncertainty.
However, Johansmeyer believes, parametric products will prove to be open to challenges around claims just like other insurance products—and those that use government data could be particularly vulnerable.
“Government data usually looks like the gold standard but there are a lot of problems with it, even in a country like the US,” said Johansmeyer.
“A lot of parametric pandemic products have been based on data provided by the World Health Organization (WHO), which gets data from US state health agencies. However, there is a considerable time lag as the data makes several stops along the way, including with the Centers for Disease Control and Prevention.”
Data from other countries can be even more problematic. Markets have long had reason to be suspicious about data coming from the Chinese government, for example. More recently in Brazil, President Jair Bolsonaro ordered the Brazilian health ministry not to publish aggregate data and instead to provide it day by day, creating delays and potential for disputes about the actual numbers.
Even when a contract specifies it will use WHO data in the contract, if the WHO data differs from the underlying data provided by the states, an insured could claim there has been a trigger failure, warned Johansmeyer.
“One side would claim that a substantive difference could mean that the trigger had failed and that the transaction requires the use of a backup,” he explained.
Johansmeyer noted the WHO itself has had two different sets of data for the same thing on its own website.
“Updating a website is not always a top priority for an organisation like that, especially during periods of crisis,” he said. “The WHO faced a lot of challenges, especially in March, so temporary significant differences aren’t necessarily a surprise.
“Ultimately the WHO does not exist to provide data for insurance contracts—frankly, they don’t care about your trade, and if they are late insureds have no recourse against them.”
Johansmeyer argued that commercial reporting agencies offer more transparency and are more motivated to provide the data quickly because that is what they exist to do. Parametric products based on commercial data may therefore be less susceptible to challenge, he said.
“It is understandable that counterparties may be reluctant to go down that route because it adds to the up-front frictional costs, but I would argue it is better to pay a little more up front than all the costs associated with litigation around a claim,” he concluded.