InsTech London’s Henry Gale speaks to Rachel Hillier, Partner at Capital Law, about the services Capital Law provides to technology companies, how parametric insurance fits within insurance law and the firm’s experiences working with insurtechs.
Henry: Can you give us a brief introduction to Capital Law?
Rachel: Capital Law is a commercial law firm of around 100 lawyers based in Cardiff and London. It has a team of insurance and financial services regulatory lawyers, which I lead.
Henry: What services does Capital Law provide to the insurance industry?
Rachel: 70% of our team’s clients are insurtechs. Capital Law is a tech-focused firm. Other clients include fintechs, niche insurers, Lloyd’s syndicates and brokers.
We advise insurtechs on how to comply with regulations and scale to other countries. Our insurance disputes lawyers work on coverage and policy wording and represent insurers and brokers.
We also provide other legal services to our clients including corporate, commercial, intellectual property, data protection, immigration, employment and general commercial disputes.
Henry: How do the regulatory needs of insurtechs differ from insurance incumbents?
Rachel: Insurtechs are like other tech companies, fast-growing and innovative, but they must comply with 20-year-old regulations. Capital Law helps insurtech companies to disrupt their markets within those regulations.
Henry: Capital Law has worked with insurtechs on parametric insurance. How would you define parametric insurance?
Rachel: Unlike traditional insurance, parametric insurance is not indemnity-based. Pay-outs are fixed and happen automatically based on the occurrence of a pre-set trigger event.
With traditional insurance, when a disaster happens, policyholders are repaid the amount of their insured losses. With parametric insurance, the policyholder is paid a predetermined sum quickly. The payment is not necessarily the same as the loss. It’s the “first responder” of insurance policies.
Henry: Why is parametric insurance an area of interest for Capital Law?
Rachel: Insurance policyholders’ frustration is often with the claims process. Business interruption during the COVID-19 pandemic is one example. Many small businesses thought they were covered, but difficulties in understanding complicated exclusions on all risks policies and in proving loss during a pandemic meant that some did not get the pay-outs they expected. To my mind, this is not the fault of the insured or the insurer, but an example of where traditional indemnity-based all risks insurance is not a product that meets demand.
I’m interested in how new technology and the concept of parametric insurance can better meet that demand. Parametric triggers work best when they are simple, with automatic payment. For example, infection rates or closure ordered by government/local authorities is publicly available and verifiable information that could trigger pre-set payments. With parametric insurance, businesses are not indemnified for their losses, so immediately receive a pre-agreed sum if the policy is triggered. Months of delay in payment, disputes over liability and quantum, and difficulties in proving loss are avoided.
Parametric insurance can also help when people or businesses struggle to get insurance against other risks such as earthquakes, floods and other natural disasters. As climate change increases the frequency and severity of extreme weather events, the need for protection will grow. Parametric insurance is part of the answer.
Insurtechs have a vital enabling role in parametric insurance, for example to provide the technology which will monitor a trigger and provide automatic pay-out.
Henry: What clients has Capital Law worked with on parametric insurance?
Rachel: FloodFlash is one example. FloodFlash’s sensors provide a physical measure of the water level during a flood, which is used as a trigger for a parametric insurance policy. The sensors are an example of technology enabling a simple idea to provide a service previously unavailable.
Henry: How does parametric insurance fit into the regulatory and legal framework for insurance products?
Rachel: The UK Financial Conduct Authority’s consumer-facing regulations are broad enough to cope with parametric insurance. The general principles of looking after customers, providing good outcomes and transparency apply to parametric insurance well.
Insurance law, however, is generally based on the indemnity principle. There are hundreds of years of case law built on the idea of indemnity, which is not how parametric insurance works. There is likely to be future case law in relation to parametric insurance.
In some countries such as South Africa and India, it is unlawful for policyholders to make a profit out of insurance, which makes parametric policies difficult (because they are not loss-based). In the US and the UK, the idea of insuring one’s life is well established; insurance policies do not always need to be based on indemnifying loss. In principle, parametric insurance works like life insurance.
Henry: What factors need to be considered when drafting a parametric insurance policy?
Rachel: Parametric insurance only works when it relies on a simple and transparent trigger. For example, the World Bank catastrophe bond for pandemics had so many factors to the parametric trigger that pay-out in 2020 was delayed and not the first response the bond was designed to be.
To design effective parametric policies, companies must answer three questions. When are pay-outs made? How many triggers do there have to be? What is the point at which the pay-out is made?
For policy drafting, companies need to provide their customers transparent and clear information about the trigger and payment.
Henry: What other areas of insurance innovation does Capital Law find interesting?
Rachel: One area is connected and autonomous vehicles. Governments are investigating how our road networks will work in the future. Truly autonomous vehicles are not yet a reality on our roads, but when they are, it will be interesting how responsibility for an accident, involving two autonomously-driven vehicles is settled.
I also expect the embedded insurance trend to continue. Instead of having general household contents insurance, I can see consumers having a suite of embedded insurance policies for their individual items.
There is also room for improvement and automation in the claims process, and I expect insurtechs to continue to disrupt the market.
Henry: Capital Law has worked with Cover Genius and Zego. What regulatory and compliance challenges did they face and how did you help them?
Rachel: For both businesses, their biggest challenge (and opportunity) is growth in other markets. Brexit has presented a challenge to UK-based insurance businesses. Before Brexit a business could expand anywhere into Europe; it has been a challenge to change that mindset. Every country in Europe has a different market with different regulations. Businesses may need a separate entity in the European Union as a base.
Another challenge is capacity. Many insurtechs have grown rapidly with an MGA model, binding insurance products as an agent of an incumbent insurer. But the MGA model has its limits and some companies are setting up their own insurance capacity. The shift from being an MGA to an insurer is a big one. The move is also a challenge to incumbent insurers who have seen the MGA market as a good source of income; that might not always be the case.
Henry: Why did Capital Law join InsTech London and what sort of companies are you looking to connect with?
Rachel: We value the opportunity to meet people in person and make connections with the InsTech London membership. I also love the podcasts. We are always interested in talking to start-ups. Capital Law is also interested in talking to traditional insurers, because we have a view of the industry they might not get from traditional law firms.
For more information on Capital Law, visit: https://www.capital-law.co.uk/