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By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

Sure, the citizens of Georgia often make fun of Alabama as their slower, more rednecky neighbor, but the Heart of Dixie might have something on the Peach State: the first-ever parametric insurance transaction completed for a U.S. state.

Swiss Re brought this idea to a number of states at industry conferences recently, according to Nikhil da Victoria Lobo, vice president of Swiss Re's public-sector unit. In the case of Alabama, he explained, Swiss Re is familiar with the state through past traditional insurance placements and has talked with the Alabama State Insurance Fund over time about the possibilities of parametric insurance. The Alabama fund's primary insurance broker, Palomar Insurance Corp., acted as a partner to help facilitate the transaction.

"Parametric insurance is a very powerful solution," said Lobo. "Traditional insurance has its limitations."

A parametric product is a transparent transaction that can provide the buyer with funds soon after a loss takes place to help with recovery, without an insurance claims process. Buyers also have flexibility in using the insurance funds as they see fit. A parametric insurance policy is designed with a trigger based on the observable characteristics of a catastrophe--say, the location of a hurricane landfall and the storm's wind speed at landfall. In this way, this special insurance product is similar to parametric catastrophe bonds.

Swiss Re would not disclose the exact trigger used in the Alabama deal.

The Alabama State Insurance Fund insures state-owned properties, primary and secondary school systems, and state university properties. It could not be reached for comment.

A TREND?

Alabama is alone among U.S. states to apply such an innovative insurance tool to transfer its CAT risk, yet among international governmental bodies, it is not unique. Entities that Swiss Re has worked with include Mexico, which signed on for the $290 million MultiCat parametric CAT bond deal in 2009, and several Caribbean nations that participate in the parametric reinsurance arrangement called the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

Lobo sees a trend.

"Three different government bodies ... and different uses of the proceeds, and yet the same underlying philosophy that the public sector and the private sector can collaborate to find instruments certainly, but also triggers and coverages, to really lessen the burden on the government and move that burden to the private sector where there is an appetite," he said.

It's a global movement making particular headway in the Americas, he explained. And with the tremendous catastrophe exposure of other U.S. states, one would think Alabama could herald an increase in the use of parametric insurance products among other public entities along the Gulf and Atlantic coasts or those out West that are near or on fault lines.

August 3, 2010

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