The Regulatory Environment for Parametric Insurance
Executive Summary
Parametric insurance proposals have emerged as potential solutions for managing a growing list of cutting-edge risks including pandemic, climate change, and even urban crime. For example, Chubb has proposed a $750 billion Pandemic Business Interruption Program through which insurance companies would sell parametric pandemic insurance contracts to small businesses.[1] Similarly, the major property and casualty insurance trade associations have jointly proposed the Business Continuity Protection Program which would employ a “[s]traightforward, objective parametric trigger”.[2]
These proposals each leap to the conclusion that parametric insurance is … insurance. In fact, parametric insurance is a “swap” within the regulatory jurisdiction of the Commodities Futures Trading Commission (CFTC).
This paper examines the broad net Congress cast to capture event contracts under the CFTC’s jurisdiction and the exclusion the CFTC crafted allowing traditional indemnity-based insurance to remain within the jurisdiction of state insurance regulation.
A PDF of this paper is available here → paper.
Dodd-Frank Wall Street Reform and Consumer Protection Act
In response to the 2008 financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act “[t]o promote financial stability of the United States by improving accountability and transparency in the financial system.”[3]
Title VII of Dodd-Frank, also known as the Wall Street Transparency and Accountability Act of 2010, created a framework for the regulation of swap markets. [4] Dodd-Frank placed the CFTC at its center.
7 U.S.C. 1a(47)(A)(ii) defines a “swap” broadly to include:
Any agreement, contract, or transaction … that provides for any purchase, sale, payment, or delivery (other than a dividend on an equity security) that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.
7 U.S.C. 16(h) provides that a swap:
(1) shall not be considered to be insurance; and
(2) may not be regulated as an insurance contract under the law of any State.
Potential Overlap with State Insurance Regulation
On August 20, 2010, the CFTC published an advance notice of proposed rulemaking seeking comments on further defining the term “swap.”
In response, the National Association of Insurance Commissioners (NAIC) raised concerns that the statutory definition of “swap” might swallow the state-regulated insurance industry:[5]
Given the breadth of these definitions, we are concerned that they could theoretically encompass a multitude of insurance products that are regulated under state law. For example, insurance policies such as auto insurance, homeowner’s insurance, and life insurance all involve contracts that provide for payment of money that is “dependent on the occurrence, non-occurrence or the extent of an event or contingency associated with a financial, economic or commercial consequence.”
The NAIC requested the CFTC to “expressly exclude insurance products regulated by the states from the definitions of swap and security-based swap.”
The American Insurance Association (AIA),[6] Property Casualty Insurers Association of America (PCI),[7] and Reinsurance Association of America (RAA)[8] echoed the NAIC’s concerns and requested the exclusion of insurance from the definition of a “swap.”
The law firm Cleary Gottlieb Steen & Hamilton LLP saw this same blurring between the respective jurisdictions of the CFTC and state insurance commissioners.[9] Rather than a blanket exemption, the firm proposed a test for the exemption of insurance products from the “swap” definition including criteria such as:
[T]hat insured parties have an insurable interest in the insured property and are generally unable to obtain payment under a policy of insurance in the absence of, or in excess of, an actual loss to such property.
The American Council of Life Insurers (ACLI)[10] and Committee of Annuity Insurers[11] pushed back against these criteria proposing instead that the “swap” definition should exclude contracts that are:
- Issued by an insurance company regulated by state insurance regulators;
- An insurance contract as defined by state law; and
- Not of the kind the CFTC has affirmatively decided to regulate.
CFTC’s Proposed Insurance Exclusion
On May 23, 2011, the CFTC published a proposed rule including an expanded definition of the term “swap”. The CFTC stated upfront that it “[does] not interpret [Dodd-Frank] to mean that products historically treated as insurance products should be included within the swap or security-based swap definition.”[12] However, the CFTC expressed concern “that agreements, contracts, or transactions that are swaps or security-based swaps might be characterized as insurance products to evade the regulatory regime under Title VII of the Dodd-Frank Act.”[13]
The CFTC proposed to exclude from “swap” definition a contract that meets both a “product test” and a “provider test”.
The Product Test
The CFTC’s proposed product test included that:
- The beneficiary of the contract maintains an insurable interest throughout the duration of the contract; and
- A loss must occur and be proved and any payment under the contract must not exceed the beneficiary’s insurable interest.
The CFTC saw the insurable interest requirement as a key differentiator from credit default swaps in which no underlying interest is required:[14]
The requirement that the beneficiary be at risk of loss (which could be an adverse financial, economic, or commercial consequence) with respect to the interest that is the subject of the agreement, contract, or transaction at all times throughout the term of the agreement, contract, or transaction would ensure that an insurance contract beneficiary has a stake in the interest on which the agreement, contract, or transaction is written.
More broadly, the CFTC viewed the requirement to indemnify an actual loss as the key distinguishing characteristic between insurance and swaps:[15]
[T]he requirement that an actual loss occur and be proved under the proposed rules similarly would ensure that the beneficiary has a stake in the insurable interest that is the subject of the agreement, contract, or transaction. If the beneficiary can demonstrate actual loss, that loss would ‘‘trigger’’ performance by the insurer on the agreement, contract, or transaction such that, by making payment, the insurer is indemnifying the beneficiary for such loss. In addition, limiting any payment or indemnification to the value of the insurable interest aids in distinguishing swaps and security-based swaps (where there is no such limit) from insurance.
The CFTC further proposed interpretive guidance that “traditional insurance products” provided by state regulated insurance companies and regulated as insurance would not be regarded as “swaps.”[16] Specifically, the CFTC identified traditional insurance products as “surety bonds, life insurance, health insurance, long-term care insurance, title insurance, property and casualty insurance, and annuity products.”
The Provider Test
The CFTC’s proposed provider test included that the contract is provided by a company organized as an insurance company and subject to the supervision of a state insurance commissioner. Further, the contract itself must be regulated as insurance under state or federal law.
The CFTC explained the rationale behind the provider test:[17]
The purpose of this proposed requirement is that an agreement, contract, or transaction that satisfies the other conditions of the proposed rules must be subject to regulatory oversight as an insurance product. As a result of the requirement that an insurance regulator must have determined that the agreement, contract, or transaction being sold is insurance (i.e., because state insurance regulators are banned from regulating swaps as insurance), the Commissions believe that this condition would help prevent products that are swaps or security-based swaps from being characterized as insurance products in order to evade the regulatory regime under Title VII of the Dodd-Frank Act.
Proposed Text of the Product and Provider Test
The CFTC proposed the following wording to reflect the relevant parts of the product and provider tests:
(4) Insurance. The term swap … does not include an agreement, contract, or transaction that:
(i) By its terms or by law, as a condition of performance on the agreement, contract, or transaction:
(A) Requires the beneficiary of the agreement, contract, or transaction to have an insurable interest that is the subject of the agreement, contract, or transaction and thereby carry the risk of loss with respect to that interest continuously throughout the duration of the agreement, contract, or transaction; [and]
(B) Requires that loss to occur and to be proved, and that any payment or indemnification therefor be limited to the value of the insurable interest; [and]
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(ii) Is provided:
(A) By a company that is organized as an insurance company whose primary and predominant business activity is the writing of insurance or the reinsuring of risks underwritten by insurance companies and that is subject to supervision by the insurance commissioner (or similar official or agency) of any State or by the United States or an agency or instrumentality thereof, and such agreement, contract, or transaction is regulated as insurance under the laws of such State or of the United States;
Industry Comments to the Proposed Rule
The NAIC generally supported the CFTC’s product and provider tests with certain reservations.[18]
First, the NAIC suggested elevating the list of traditional insurance products from interpretive guidance to the text of the rule itself. The NAIC also suggested adding to the list of traditional insurance products “mortgage guaranty, accident, and disability insurance.”
Second, the NAIC expressed concern about the insurable interest requirement:
With regard to the first prong, most insurance products do not require a person or entity to have an insurable interest continuously throughout the duration of the insurance policy or contract. For example, if a person wishes to procure insurance on the life of another person, then he or she only needs to have an insurable interest at the time that he or she procures the life insurance policy. With regard to insurance covering property damage, in many jurisdictions, a person only needs to have an insurable interest at the time of the loss. Indeed, an insurable interest is not even required for a liability, surety or accident and health insurance policy or contract.
The associations representing insurance companies took a range of positions.
The PCI applauded the two-prong (product and provider) test as “an effective means of helping to distinguish between those contracts that qualify for exclusion from the definition of swap and swap-related securities from those contracts that will not.”[19]
In contrast, the AIA rejected the two prong-test in favor of near complete deference to state insurance regulators:[20]
[W]e urge the Commissions to state unequivocally in the rule and the interpretive guidance that, where an agreement, contract or transaction is reportable as insurance in the provider’s regulatory and financial reports under a state’s (or a foreign jurisdiction’s) insurance laws, then that agreement, contract or transaction constitutes an insurance product rather than a swap or a security-based swap.
The ACLI sought a middle solution through which products subject to state insurance regulation are presumed to be excluded from the definition of swaps.[21]
Final Rule
On August 13, 2012, the CFTC released its final rule defining “swap” for the purposes of Title VII.[22]
The Product Test
In adopting the final rule, the CFTC left the product test (including its requirements of an insurable interest and proof of loss) unchanged. However, the final rule included an alternative to the provider test for a product that is one of the “enumerated types of traditional insurance.”[23] The enumerated list of traditional insurance includes “property and casualty insurance.”
The CFTC equates the enumerated product list with traditional insurance products:[24]
The Commissions believe that the Enumerated Products, as traditional insurance products, are not the types of agreements, contracts, or transactions that Congress intended to subject to the regulatory regime for swaps and security-based swaps under the Dodd-Frank Act. Codifying the Enumerated Products in the final rules appropriately places traditional insurance products outside the scope of the swap and security-based swap definition so long as such Enumerated Products are provided in accordance with the Provider Test, including a requirement that an Enumerated Product that is provided in accordance with the first prong of the Provider Test must be regulated as insurance under applicable state law or the laws of the United States.
The CFTC refers to the original product test for the evaluation of non-traditional products:[25]
[The CFTC does] not believe it is appropriate to determine whether particular complex, novel or still evolving products are swaps or security-based swaps in the context of a general definitional rulemaking. Rather these products should be considered in a facts and circumstances analysis.
The Provider Test
The provider test remains a second hurdle to the insurance exclusion whether the original product test or the traditional insurance test is applied.[26] The CFTC expanded the provider test to include non-U.S. insurance companies that are eligible to provide insurance in the United States under state law.
The CFTC emphasized that the provider test retains the requirement that a product is “regulated as insurance” under applicable state law:[27]
The Commissions have retained the requirement in the first prong of the Provider Test that an insurance product must be regulated as insurance, but have revised the provision to clarify that an insurance product must be regulated as insurance under applicable state law or the laws of the United States. As discussed above, the Commissions believe that this condition will help prevent products that are not regulated as insurance and are swaps or security-based swaps from being characterized as insurance products in order to evade the regulatory regime under the Dodd-Frank Act.
In administering the definition of a “swap,” the CFTC will look beyond self-serving characterizations of a product “to prevent evasion through clever draftsmanship of a form, label, or other written documentation.”[28] The CFTC further warned:[29]
[T]he structuring of instruments, transactions, or entities to evade the requirements of the Dodd-Frank Act may be ‘‘limited only by the ingenuity of man.’’ Therefore, the CFTC will look beyond manner in which an instrument, transaction, or entity is documented to examine its actual substance and purpose to prevent any evasion through clever draftsmanship — an approach consistent with the CFTC’s case law in the context of determining whether a contract is a futures contract and the CFTC’s interpretations in this release regarding swaps.
Text of the Final Rule
The relevant text of the final rule is as follows:[30]
(4) Insurance. (i) This paragraph is a non-exclusive safe harbor. The terms swap … and security-based swap … does not include an agreement, contract, or transaction that:
(A) By its terms or by law, as a condition of performance on the agreement, contract, or transaction:
(1) Requires the beneficiary of the agreement, contract, or transaction to have an insurable interest that is the subject of the agreement, contract, or transaction and thereby carry the risk of loss with respect to that interest continuously throughout the duration of the agreement, contract, or transaction; [and]
(2) Requires that loss to occur and to be proved, and that any payment or indemnification therefor be limited to the value of the insurable interest; [and]
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(B) Is provided:
(1)(i) By a person that is subject to supervision by the insurance commissioner (or similar official or agency) of any State or by the United States or an agency or instrumentality thereof; and
(ii) such agreement, contract, or transaction is regulated as insurance under applicable State laws or the laws of the United States;
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(4) In the case of non-admitted insurance, by a person who:
(i) Is located outside of the United States and listed on the Quarterly Listing of Alien Insurers as maintained by the International Insurers Department of the National Association of Insurance Commissioners; or
(ii) Meets the eligibility criteria for non-admitted insurers under applicable State law; [or]
(C) Is provided in accordance with the conditions set forth in paragraph (xxx)(4)(i)(B) of this section and is one of the following types of products:
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(7) Property and casualty insurance;
Application of the Two-Pronged Test to Parametric Insurance
The NAIC defines parametric insurance as a form of non-indemnity insurance that pays out based on the parameters of an event rather than the losses resulting from an event:[31]
The term parametric insurance describes a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of the losses in a traditional indemnity policy.
Parametric insurance falls squarely within the broad definition of a “swap.” It is a “contract … that provides for … payment … that is dependent on the occurrence, nonoccurrence, or the extent of the occurrence of an event or contingency associated with a potential financial, economic, or commercial consequence.”
The more interesting question is whether parametric insurance is excluded from the definition of a “swap” through the application of the two-pronged test. To come within the safe harbor of the insurance exclusion, a parametric insurance contract must satisfy both:
- The product test either because parametric insurance is a kind of traditional property and casualty insurance or because parametric insurance requires a loss to occur and be proved with any payout limited to the amount of that loss; and
- The provider test because the parametric insurance is regulated as insurance under state law.
Parametric Insurance Fails the “Traditional Insurance” Alternative of the Product Test
Parametric insurance is certainly not a traditional kind of property and casualty insurance. Indeed, the Insurance Information Institute characterizes “[t]he parametric model [a]s an alternative to traditional insurance.”[32]
Further, parametric insurance is almost always described as a “non-traditional” kind of insurance.[33] As the insurance broker Marsh & McClennan described parametric insurance by contrasting it with traditional insurance:[34]
Parametric covers are alternative risk solutions provided by insurance and reinsurance companies that enable organizations to finance or to transfer risk in a non-traditional way.
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Parametric covers are not intended to replace traditional insurance — but to complement them and speed up recovery.
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Parametric covers can be especially useful when there is a lack of capacity or appetite from traditional insurance markets, especially for risks that are typically underinsured or uninsured or where the impact of the event is related to business interruption losses that are greater than the direct costs of the loss or damage of physical assets.
Parametric insurance is always marketed as different from traditional insurance. For example, United Surety & Indemnity Company recently launched a Cash in an Emergency parametric product sold to individuals.[35] This product is advertised as a supplement to “traditional property insurance.”
Given the unanimity in regarding parametric insurance as “non-traditional”, there is simply no intellectually honest way to shoehorn parametric insurance into the enumerated list of the kinds of traditional insurance.
The closest kind of traditional insurance in that list is perhaps “property insurance.” However, the industry is aggressively defending the conceptual perimeter of traditional property insurance in ongoing COVID-19 litigation. According to the American Property Casualty Insurance Association (APCIA) and the National Association of Mutual Insurance Companies (NAMIC),[36] the concept of “property insurance” is tied to the necessity of direct physical loss or damage.
In a filing before the 7th Circuit, these trade associations explained that property insurance in the United States responds only to an actual, provable loss:[37]
As Cincinnati points out, property insurance policies provide coverage for losses resulting from a fire or windstorm, for example. (Appellee Br., at 5). They do not cover business income losses unless they are caused by direct physical loss or damage to the insured property…. This type of insurance covers property, such as an insured’s building or its personal property (e.g., equipment, furniture) against risks of direct physical loss or damage, such as a fire, windstorm, or theft.
In a filing before the 9th Circuit, these same associations reiterated that traditional “property insurance” cannot respond to claims of purely economic loss:[38]
The overwhelming weight of authority agrees: no amount of artful pleading or clever argument can convert claims for purely economic losses into claims for physical loss of or physical damage to property as required for coverage under a property insurance policy.
Parametric Insurance Also Fails the Original Product Test
Parametric insurance necessarily fails the product test’s limitation of payouts to actual, proven losses.[39] The fundamental feature of parametric insurance is that the contract pays out based on the parameters of the event and not the amount of loss resulting from the event.[40]
For example, United Surety & Indemnity Company’s Cash in an Emergency parametric product emphasizes that a full payout is made without any proof of an actual loss:
What difference does this insurance have with the other insurance that I already know?
The main difference is in the way in which the activation of the cover is determined after a hurricane or earthquake. Since the payment is made without the need for any type of adjustment, without damage assessment and without deductibles. For a parametric microinsurance policy to be activated, it is not required that there be physical damage to the property, but that the established parameters have been met.
Parametric Insurance Fails the Provider Test
The provider test requires, in part, that “the agreement, contract, or transaction is regulated as insurance under applicable State laws or the laws of the United States.” With one notable exception, no state insurance regulator has attempted to expressly regulate parametric insurance. As the NAIC has observed:[41]
Few jurisdictions have regulations specific to parametric insurance policies, so in general they exist under the same regulatory framework as traditional policies. This can create hurdles in some jurisdictions where principles of indemnity or contingency are mentioned in the existing insurance legal framework.
In fact, the APCIA has been pressing the NAIC to consider “allowing parametric insurance” since at least 2019.[42] For at least the last 20 years, New York has viewed parametric insurance to fall outside of the scope of insurance regulation:[43]
Weather derivatives do not constitute insurance contracts under Section 1101(a) of the New York Insurance Law because the terms of the instrument do not provide that, in addition to or as part of the triggering event, payment to the purchaser is dependent upon that party suffering a loss. Under such instruments, the issuer is obligated to pay the purchaser whether or not that purchaser suffers a loss. Neither the amount of the payment nor the trigger itself in the weather derivative bears a relationship to the purchaser’s loss. Absent such obligations, the instrument is not an insurance contract.
Recently, the NAIC added parametric insurance regulation to its innovation agenda.[44] The NAIC’s Climate and Resiliency (EX) Task Force’s Innovation Workstream is actively exploring “principles and standards or guidelines around these types of products.”[45] The task force has received background presentations on parametric insurance from:
- CoreLogic (December 15, 2020);
- Professional Solutions Insurance Company (March 25, 2021);
- First Insurance Company of Hawaii (May 10, 2021);
- Global Parametrics (June 3, 2021); and
- Bermuda Monetary Authority (July 21, 2021).
Puerto Rico is the first U.S. jurisdiction to introduce a regulatory regime for parametric contracts. Rule 103 from the Department of Insurance defines parametric insurance as:[46]
[T]he kind of insurance contract, which unlike traditional insurance, insures the policyholder against the occurrence of an event specified in the contract, by paying a predetermined fixed amount of money based to the magnitude of the triggering event, (the “trigger level”), and not based on an adjustment of the actual loss. The insurable interest is verified at the time of executing the contract and consists in the fact that the insured has a reasonable expectation that he will incur an economic loss in the event that the predetermined adverse event, as established in the contract, occurs. The parametric product may provide for an automatic method of payment by the insurer, upon the occurrence of the triggering event, or a method of payment in which the insurer requires the insured to provide notice of the occurrence of the event.
Because 7 U.S.C. 16(h) prohibits a swap from being “regulated as an insurance contract under the law of any State” it is doubtful Puerto Rico’s unilateral initiative to occupy this regulatory space (more than a decade after Dodd-Frank became law) will be seen as sufficient to displace the existing jurisdiction of the CFTC.
Conclusion
Parametric insurance may one day prove an effective tool to assist U.S. businesses, nonprofits, local governments, and even families to manage the risks of pandemic, climate change, and other pressing threats. Before it can be trusted to deliver on that promise, pandemic insurance must first be grounded in an appropriate regulatory framework.
Parametric insurance is a swap. The safe harbor carving out traditional insurance from the CFTC’s jurisdiction only extends to products indemnifying against an actual, proven loss. The CFTC’s insurance exclusion cannot be reasonably stretched to encompass contracts offering a formulaic payout based on the parameters of an event.
The potential of parametric insurance and the innovative parametric pandemic insurance programs currently before policymakers remain very much alive — but the CFTC must step up to the table as the regulator of swaps.[47] Without the leadership of the CFTC, Congress, insurance regulators, businesses and other stakeholders will continue to feel their way around possible parametric insurance solutions largely in the dark.
For their part, insurance companies and insurance agents and brokers would be well positioned under the jurisdiction of the CFTC to compete in a vibrant parametric insurance market alongside other financial services sectors. Dodd-Frank does not prohibit insurance companies from offering swaps such as parametric insurance. It does require an insurance company issuing a swap to come in line with CFTC rules such as registration, data reporting, anti-money laundering protections, training and oversight of staff, and use registered brokers.
[1] Pandemic Business Interruption Program (July 8, 2020).
[2] The Business Continuity Protection Program: Building on Experience to Develop an Affordable and Effective Federal Program for Future Pandemic Business Relief (Dec. 8, 2020).
[3] H.R. 4173 (111th Congress).
[4] 15 USC 8301, et seq.
[5] NAIC Comment Letter (Sept. 20, 2010) at page 2.
[6] AIA Comment Letter (Sept. 20, 2010) at page 2.
[7] PCI Comment Letter (Sept. 17, 2010) at page 1 (suggesting that for new forms of insurance “a rebuttable presumption of an exclusion that could be overcome by a formal CFTC finding would provide further clarity regarding regulatory jurisdiction”).
[8] RAA Comment Letter (Sept. 20, 2010).
[9] Cleary Gottlieb Steen & Hamilton LLP Comment Letter (Sept. 21, 2010) at pages 2–4. The firm appeared to be interested in preventing credit default swaps from being treated as insurance.
[10] ACLI Comment Letter (Nov. 12, 2010).
[11] CAI Comment Letter (Dec. 3, 2010).
[12] 76 FR 29821.
[13] 76 FR 29822.
[14] 76 FR 29823.
[15] 76 FR 29823. This reasoning aligns with FASB 720–20–25–1 which provides “[t]o the extent that an insurance contract … does not, despite its form, provide for indemnification of the insured … by the insurer … against loss or liability, the premium paid … shall be accounted for as a deposit by the insured.” See CFTC Letter 14–67 in which no-action relief is granted to reinsurance on the basis that the “coverage provided under the Reinsurance Agreement is either 100%, or some lesser percentage, of the actual … risk assumed [by the cedant].”
[16] 76 FR 29824.
[17] 76 FR 29824. The provider test includes the lawful reinsurance of a contract meeting the provider test even if the reinsurer does not itself meet the provider test because it is regulated outside of the United States.
[18] NAIC Comment Letter (July 22, 2011).
[19] PCI Comment Letter (July 22, 2011).
[20] AIA Comment Letter (July 22, 2011).
[21] ACLI Comment Letter (July 22, 2011). See also MetLife Comment Letter (July 22, 2011).
[22] 77 FR 48208.
[23] 77 FR 48213.
[24] 77 FR 48216.
[25] 77 FR 48218.
[26] 77 FR 48213.
[27] 77 FR 4822. The CFTC also noted that “[a]n agreement, contract, or transaction that is labeled as ‘reinsurance’ or ‘retrocession’ but is structured to evade Title VII of the Dodd-Frank Act, would not satisfy the Insurance Safe Harbor, and would be a swap or security-based swap.” 77 FR 48213. See footnote 41 referencing potential mislabeling of a “weather derivative or catastrophe swap” as reinsurance.
[28] 77 FR 48298.
[29] 77 FR 48300.
[30] 77 FR 48350.
[31] Parametric Disaster Insurance, NAIC. (www.content.naic.org/cipr_topics/topic_parametric_disaster_insurance.htm)
[32] 2021 Insurance Fact Book, Insurance Information Institute, at page 12.
[33] See Written Testimony of Brian Kuhlmann on behalf of APCIA and NAMIC, Insuring Against a Pandemic: Challenges and Solutions for Policyholders and Insurers (Nov. 19, 2020) (“Unlike the traditional insurance claims adjustment process, the parametric trigger would provide payments automatically upon the occurrence of certain events.”); Written Testimony of Joanna Syroka of Fermat Capital, Creating a Climate Resilient America: Strengthening the U.S. Financial System and Expanding Economic Opportunity (October 1, 2020) (referring to “the use of innovative risk transfer mechanisms such as parametric insurance and catastrophe bonds”); The Insurability of Business Interruption Risk in Light of Pandemics, EIOPA Staff Paper (2021) at page 10 (comparing “parametric solutions” with “classical indemnity-based solutions”).
[34] Parametric Insurance: A Tool to Increase Climate Resilience, Marsh Insights (Dec. 2018).
[35] www.cashdeemergencia.com.
[36] The American Property Casualty Insurance Association (APCIA) and the National Association of Mutual Insurance Companies (NAMIC) together represent 67% of the commercial property insurance market and 66% of the homeowners insurance market, respectively. Amicus Brief filed May 5, 2021, TJBC v. Cincinnati Ins. Co., №21–1203 (7th Cir.). The APCIA is the successor of the PCI and AIA.
[37] Amicus Brief filed May 5, 2021, TJBC v. Cincinnati Ins. Co., №21–1203 (7th Cir.) at pages 5–6.
[38] Amicus Brief filed June 16, 2021, Mark’s Engine Company №28 Rest. V. Travelers, №20–56031 (9th Cir.) at page 6.
[39] The Warton Risk Management and Decision Process Center has observed that “[t]he key to effective use of parametric insurance (as opposed to other parametric products), is to identify a proof-of-loss that is acceptable to regulators and that does not add to the cost or slow the payment, either of which would undercut key benefits of a parametric approach.” Parametric Insurance for Disasters (Sept. 2020) at page 4. The paper offers a rather aggressive suggestion that a “text messages from customers … to confirm damages” may be sufficient proof of the existence and extent of actual loss. The RAND Corporation has been more circumspect in flagging that ”[u]nder some configurations, parametric policies might be considered financial derivatives and therefore might be subject to oversight by the Commodities Futures Trading Commission, as opposed to state insurance regulators.” Improving the Availability and Affordability of Pandemic Risk Insurance (2021) at page 6, footnote 3.
[40] Some products are designed with a parametric trigger but limited loss payments to the amount of actual proven loss. See West Bend Mutual Insurance Company’s Event Cancellation Insurance, Form NS 0459 (08/19).
[41] Parametric Disaster Insurance, CIPR Topics, NAIC.
[42] Minutes of the NAIC’s Property and Casualty Insurance © Committee (Dec. 9, 2019) at pages 4 and 72 (“allow new and unique products in the marketplace for catastrophe perils … An example could be parametric insurance products”) and (“Mr. Snyder stressed state insurance regulators should allow innovations such as revising anti-rebating laws and allowing parametric insurance).
[43] Weather Financial Instruments, Opinion of the Office of the General Counsel, New York Department of Financial Services (Feb. 15, 2000).
[44] NAIC, Agenda of the Innovation Workstream of the Climate and Resiliency (EX) Task Force (May 10, 2021) (“Discuss Top Concerns and the Need for a Deliverable Regarding Parametric Insurance”).
[45] NAIC Minutes of Innovation and Technology (EX) Task Force (April 9, 2021) at page 2.
[46] Requirements for Submitting and Processing Parametric Catastrophic Microinsurance in Personal Lines. Rule 103, Sec. 4.c. (July 2, 2020).
[47] The CFTC does not appear to have engaged in parametric insurance proposals which have been the subject of hearings by conducted by the House Subcommittee on Housing, Community Development and Insurance (Nov. 19, 2020), or Senate Subcommittee on Securities, Insurance, and Investment (July 22, 2021).
