InsTech’s Henry Gale speaks to Matt Coleman, Chief Risk Officer of the Demex Group about closing the severe thunderstorm insurance protection gap, modelling climate risks and parametric reinsurance.
Matt: The Demex Group is a technology-enabled MGA. Demex analyses, prices and structures climate risk transfer products, with a focus on non-catastrophic climate perils.
It was founded as an insurtech start-up within Munich Re. Munich Re saw an opportunity to use the team’s expertise in climate data science, technology and risk management to help close the climate risk protection gap that exists for corporates and insurers.
In early 2020, Demex secured venture capital funding and spun out to become its own company. Today Demex works closely with intermediaries and risk capacity providers to offer climate risk transfer products to corporates and insurers. Nephila Capital and Munich Re are currently providing capacity for Demex, amongst other partners.
Henry: What is your role and what does it involve?
Matt: I have worked in climate risk for more than 20 years, combining my expertise in meteorology and finance to pursue a better understanding of the financial impact that climate and weather have on business
Henry: What climate perils does Demex specialise in?
Matt: Demex’s expertise is in underwriting non-catastrophic climate perils. These perils are more frequent and less severe than natural catastrophes like hurricanes. Furthermore, non-catastrophic perils are five times more frequent and impactful since the 1980s and today are not as well serviced by the insurance market. Examples include rainfall, changes in temperature, wind and snowfall. In isolation, these perils can affect corporate earnings. In combination, they can spawn events such as severe thunderstorms that can significantly impact corporates and insurers.
Henry: What kinds of losses are caused by severe thunderstorms?
Matt: Severe thunderstorms can incorporate weather events such as tornadoes, hail and very strong wind speeds. The types of losses caused vary depending on the event.
Severe thunderstorms can cause physical damage to properties and other assets. Insurers can be highly exposed to these losses; losses accumulate over many properties to become a significant cost for the insurer. For the subset of severe thunderstorms that are relatively less severe and more frequent, insurers are often not reinsured against these risks.
Severe thunderstorms can also cause non-physical losses: business interruption and earnings volatility. Small businesses and investors in commercial property are exposed to losses when thunderstorms result in reduced footfall. Construction companies are exposed to earnings volatility due to the impact weather can have on completing projects and the costs of materials.
Henry: How is the reinsurance market currently dealing with severe thunderstorm risks?
Matt: While many corporates and insurers are exposed to severe thunderstorm risks and looking to buy protection, sufficient cover is not offered by many protection sellers (reinsurers and insurance-linked securities investors) partly because these risks are relatively harder to model and underwrite. This particularly applies to the subset of severe thunderstorms in the United States that are relatively less severe and more frequent.
Protection sellers’ uncertainty around pricing thunderstorm risks results in high premiums. Protection sellers also have limited reinsurance capacity which is in high demand, so they are more inclined to offer cover for other perils where they have greater confidence in risk assessment.
There is now an opportunity for protection sellers to underwrite severe thunderstorm risks with more confidence. This is a result of recent advances in data availability and climate data science. Demex believes this new offering could generate returns on capital that rival or surpass underwriting other natural perils.
Henry: What impacts is the current lack of severe thunderstorm reinsurance capacity having on insurers?
Matt: A series of losses from severe thunderstorms, when retained by insurers (meaning the risk is not covered by reinsurance), can affect an insurer’s solvency. If insurers are unlucky with several severe thunderstorms affecting their portfolio in one year or across multiple years, their credit rating could be at risk.
Another impact is on insurers’ capital planning. If insurers have retained severe thunderstorm risks in the past, they might assume that their level of retained risk will stay the same. However, as climate change makes some losses more frequent and severe, insurers could need to redirect capital intended for other purposes to pay additional thunderstorm claims.
Henry: How does Demex quantify the risk of severe thunderstorms?
Matt: There are two elements to quantifying severe thunderstorm risks: first, quantifying the risk of thunderstorms occurring; second, quantifying the potential financial impact of a thunderstorm.
Demex is pioneering a new approach to assess severe thunderstorm risk. To quantify the risk of weather events such as thunderstorms occurring, Demex uses weather data from sources such as satellites and weather stations globally. These datasets show the historical frequency of weather events, but also trends in how the frequency and variability of weather phenomena are changing over time. This allows Demex to create climate-conditioned models, using historical data to understand the risk of weather events in today’s climate.
To quantify the financial impact of weather events, cedents provide Demex with proprietary data on their historical financial experience. Demex combines historical weather data with this financial data to understand the relationship between weather events and financial losses. This enables Demex to design risk transfer products that are customised to a protection buyer’s risk management needs.
Henry: What solutions does Demex offer for severe thunderstorm risks?
Matt: Demex’s Retained Climate Risk Reinsurance (RCR Re) solution is a parametric reinsurance product designed to help corporates and insurers transfer high-frequency weather perils, such as severe thunderstorm risks. It is available globally.
Based on a protection buyer’s historical losses from severe thunderstorms, Demex identifies the weather variables at certain locations that most closely correlate to those losses. Demex then creates a customised parametric index using those weather variables. The economic index serves as a proxy to measure what an insurer or corporate would expect to lose from severe thunderstorm events, based on the weather. Demex continuously monitors the index. If it exceeds a predefined threshold, the protection buyer receives a pay-out.
As well as severe thunderstorm risks, Demex can structure RCR Re solutions for other single or combinations of weather perils.
Henry: How is the climate risk transfer market reacting to Demex’s RCR Re product?
Matt: The market understands and has validated the need for an innovative product that transfers risks that are typically retained. Protection buyers are showing interest in RCR Re because it is customised to their own financial experience. Reinsurers are backing the product because it offers a new approach to assess climate risks, such as severe thunderstorm risks, that increases their confidence to underwrite those risks, especially in the context of climate change. For intermediaries, RCR Re is a scalable opportunity to address unmet demand from their clients for climate risk transfer.
Henry: What other solutions has Demex built?
Matt: Another suite of products Demex offers is Operation Climate Risk (OCR) covers. These are designed to help corporates manage non-physical climate risks such as earnings volatility. OCR covers are also calibrated to the financial experience of the protection buyer.
Examples of transactions Demex has undertaken to date include transferring snow risks for property managers exposed to the uncertainty of snow removal costs. OCR covers can address single or combinations of weather perils that cause volatility in earnings.
Henry: Why has Demex joined InsTech as a corporate member?
Matt: InsTech’s broad understanding and coverage of the insurance technology market makes it an important source for understanding innovation in insurance. InsTech’s focus on parametric risk transfer and climate risks match Demex’s expertise.
Demex is excited to be a part of the network to continue our learning about the insurance technology market and contribute thought leadership.
Henry: What sort of companies would Demex like to connect with?
Matt: Demex would like to connect with prospective protection buyers like corporates or insurers, protection sellers such as reinsurers and intermediaries that are looking to solve climate risk problems.
To find out more about the Demex Group, email contact@TheDemexGroup.com