Overview of Parametric Insurance in Hong Kong

With the increasingly severe and unpredictable weather events in 2023, such as the typhoon 10 and the “one-in-500-years” black rainstorm in Hong Kong, these extreme climate events render past climate records inadequate for reference and have created a huge challenge for conventional insurance as it traditionally uses historical data for risk pricing and modelling. As noted from an interview with Victor Kuk, Head of Property & Casualty Reinsurance SID at Swiss Re, due to rapid economic development, urbanization and expanding populations, over 30% of the global natural catastrophe events in 2022 occurred in Asia. And a recent study conducted by Swiss Re reveals that 76% of the natural catastrophe exposures are in fact unprotected by insurance and reinsurance. This has demonstrated the demand and great opportunity for insurance products such as parametric insurance to bridge the increasing gap, stemming from natural disasters, between economic losses and insured losses.

In the APAC region, Hong Kong has been relatively flexible and open to the concept of parametric insurance. While there is no specific legislation governing parametric insurance in Hong Kong, parametric insurance contracts are generally recognized as valid insurance contracts, and they can be reinsured on the same basis as traditional reinsurance contracts.

While parametric insurance would not directly replace traditional insurance policies, it complements traditional insurance policies and can bridge the protection gap and cover risks that have traditionally been uninsurable or difficult to insure. Compared to traditional insurance, parametric insurance is more transparent and could offer a faster payment process and reduce costs as the payout to the policyholders is agreed in advance, based on pre-determined payout formulas.

The parameters, specific triggers and payout of the parametric solution could also be tailored to the insured’s needs and provide coverage for assets that could not be insured traditionally. For example, a business might be concerned about potential business interruption caused by future typhoons affecting their transmission and distribution (T&D) systems. As such, we have seen that Marsh designed a customized parametric typhoon insurance policy, where claim payouts are determined by the typhoon’s sustained wind speed in the indemnification zone.

One notable adoption of parametric insurance in Hong Kong is the first-ever typhoon warning insurance solution Insur8 developed and launched by Swiss Re Corporate Solutions. The solution will indemnify and pay out policyholders automatically in case of any loss of earnings and additional operating costs caused by a typhoon warning signal number 8 or above issued by the Hong Kong observatory. The form of coverage could potentially include any loss of earnings from customers not being able to reach the store or premises of the business, reimbursement costs from the cancellation or postponement of an event, and loss of revenue from reduced productivity, etc.

With the increasing frequency and severity of extreme weather events in Hong Kong and in the wider Greater Bay Area region, we anticipate that the trend towards parametric insurance will undoubtedly continue to grow in the APAC region.

If you would like any advice on parametric insurance solutions in Hong Kong, please contact the authors.