Guy Carpenter Experts Weigh in on Parametrics for Wildfires, Cyclones

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This article from Guy Carpenter’s Guillermo Franco, Managing Director and Global Head of Catastrophe Research, and his team discusses how parametric solutions can help hasten recovery after natural catastrophes. This article is part of Marsh McLennan’s handbook, Triggering Change: Parametric Solutions for Climate Resilience.

Parametric policies trigger rapid payouts based on the physical characteristics of an event and can be used toward a broad range of losses. For these reasons, parametric policies may be used effectively as a complement to indemnity insurance to disburse funds in a fast, transparent manner. Since parametrics are not linked to specific losses sustained by a given physical asset, they have helped governments cover emergency and response costs and corporations to cover business interruption losses.

However, since parametrics are triggered by an event characteristic (such as reaching a threshold of sustained wind speed) as opposed to evaluation of the physical loss, they need to be critically evaluated, assessed and understood when considering them in risk management strategies. GC StormGrid and GC FireCell are Guy Carpenter proprietary engines to design high-resolution parametric tropical cyclone and wildfire solutions.

GC StormGrid tracks information published in real-time by global meteorological agencies to design parametric tropical cyclone covers. It considers a grid of cells instead of a single geographic domain, which reduces basis risk and limits the potential of missing events.

GC FireCell is used to design parametric wildfire covers indexed to wildfire data published in real-time through NASA’s Fire Information for Resource Management System. GC FireCell produces a recovery if a wildfire event is detected within an asset’s proximity, rather than requiring evidence that a wildfire has reached a specific asset.

Guy Carpenter’s parametric solutions minimize basis risk, are well suited to design parametric transactions for spread-out portfolios of exposures, and are available globally.