The Parametric Post, the only newsletter dedicated to parametric insurance.
Thought for the day… how parametric is filling wildfire protection gaps
With wildfire risk increasing in many areas, particularly California, it is becoming more and more challenging for insurers to underwrite traditional insurance profitably. Since 2022, seven of California’s top twelve insurers have restricted new business in the state. California’s public sector insurance scheme, the FAIR Plan, represents a 3% share of the market. Businesses not eligible for public sector schemes due to their large exposures are starting to turn to parametric insurance as an alternative or to fill gaps in traditional coverage.
Several insurers and MGAs including AXA Climate, Descartes Underwriting, Generali, Kettle, Liberty Mutual Re, Munich Re and Swiss Re underwrite parametric wildfire policies. The most common type of parametric wildfire policy involves having a monetary value assigned to certain geographical areas. If satellite imagery shows one of the areas, or a proportion of it, to be burnt, a pay-out is calculated accordingly. So far, these types of policies have been most widely adopted by the forestry and agriculture sectors.
Recent wildfires have also highlighted businesses’ exposures to risks other than physical damage. Wildfires in Canada caused haze across the Northeastern US in June 2023, with tens of millions of people subject to air quality alerts and official recommendations to limit outdoor activity. This causes non-damage business interruption (NDBI), as customers choose to stay indoors or businesses suspend operations for employee health and safety concerns. These losses may not be covered by traditional business interruption insurance. Swiss Re Corporate Solutions has designed a parametric product to protect businesses in Singapore from NDBI losses caused by haze.
With climate change, increasing development near forests and political issues, new solutions (including parametrics) are required to help insurers and their customers manage wildfire risks. Our latest report, “Beyond the smoke: understanding and mitigating wildfire risks” covers the recent advances in data and models and new parametric products, with insights from Nephila Capital, Swiss Re, Generali and Guy Carpenter. You can download the report for free here.
In the news…
WTW policy for UNICEF pays out $3.9m in 2023
Humanitarian aid • Cyclone
At last year’s COP27 climate conference, the United Nations Children’s Fund (UNICEF) announced it would be covered by a new parametric insurance policy structured by broker WTW. UNICEF provides humanitarian aid to children globally; its parametric policy is designed to fund aid efforts after a tropical cyclone strikes Bangladesh, Comoros, Fiji, Madagascar, Solomon Islands or Vanuatu. It has now been announced that the policy paid out a total of $3.9 million USD in 2023 across nine events. The policy is backed by AXA Climate, Global Parametrics and the Lloyd’s Disaster Risk Facility.
Floodbase partnership for parametric flood in Asia
Asia • Flood
Floodbase is working with broker Oneglobal to develop and distribute parametric flood insurance solutions to organisations across Asia. The organisations announced the partnership at the Lloyd’s Lab Demo Day, where Floodbase had participated in Cohort 11 of the accelerator programme.
Aon: are you prepared for the 2024 hurricane season?
North America • Hurricane
Broker Aon is running a webinar on 13 December about the outlook for the 2024 Atlantic hurricane season (typically considered to be from 1 June to 31 November). The webinar will look at the uncertainty in the traditional insurance market and how parametric solutions can be a critical tool for organisations to manage their hurricane risks.
How different parametric structures respond to past cyclones
Hurricane • Cyclone • Typhoon
There are two common approaches to parametric coverage for tropical cyclones. ‘Cat in the circle’ (or ‘cat in the box’) policies pay out based on the category of the cyclone and the policyholder’s distance from the track. The other approach pays out based on the wind speed at a policyholder’s location. Modelling firm Reask has released a free online demo tool to illustrate how the resulting pay-outs differ, using historic data from Hurricane Katrina (2005), Typhoon Haiyan (2013) and Typhoon Jebi (2018).
COP28: AXA and Howden launch Togo flood scheme
Togo • Flood
At the COP28 climate summit, MGA AXA Climate, broker Howden and local NGO PADIE have announced a flood resilience project for three towns in Togo, West Africa. The project will involve modelling the municipalities’ flood risk and designing a parametric insurance scheme to cover them. Howden will finance $100,000 USD in insurance premiums for the scheme’s first year and the InsuResilience Solutions Fund is expected to contribute $150,000.
1,400 farmers paid in Mexico, IDF adds parametric partners
Mexico • Flood • Drought
The Insurance Development Forum (IDF) has provided updates on its Tripartite Programme, which involves supporting vulnerable communities with risk financing. The IDF says more than 1,400 farmers in Mexico were paid in its pilot of parametric flood and drought cover this year. The pay-outs were delivered with Raincoat’s technology. Meanwhile, parametric underwriters Global Parametrics, Generali and Descartes Underwriting have joined the IDF’s working group.
COP28: African Development Bank plans $1bn facility
Africa • Climate
The African Development Bank has announced plans to raise $1 billion USD to protect more than 40 million farmers against climate events. The Africa Climate Risk Insurance Facility for Adaptation (ACRIFA) will provide insurance capacity and technical assistance grants to help governments, NGOs, financial institutions and individual farmers access insurance. Much of this insurance is likely to be parametric.
Hundreds of French farmers paid after 2023 droughts
France • Drought
MGA Meteo Protect reports that all its customers who purchased parametric drought coverage for farms in France were paid this year. One farmer paid €3,200 EUR in premium and received a €22,500 EUR pay-out in June.
COP28: UK and US pledge support for parametric programmes
UK • US • Africa
The UK government has announced £7.4 million GBP in funding for the government of Somalia to purchase parametric drought insurance from the African Risk Capacity for 3 years. The UK will also provide £7.1 million to help humanitarian group Start Network purchase disaster insurance covering Senegal, Somalia, Madagascar and Zimbabwe for 2 years. Meanwhile, the US government has cited parametric insurance as a key part of its efforts to help vulnerable countries respond to climate change. The White House’s PREPARE programme to encourage private sector investment in climate adaptation has 25 partners including brokers Aon, Howden, Marsh McLennan and WTW.
Cerchia completes cyber catastrophe and wildfire transactions
Cyber • Wildfire • ILS
Cerchia, which is building a digital marketplace for parametric risk transfer, has announced two new transactions backed by capacity from capital markets. One transaction uses Verisk PCS industry loss data on cyber catastrophes to protect an organisation against catastrophic cyber losses. The other provides protection against wildfires in California.
New investments for start-ups Ensuro, CatX and Igloo
Blockchain • ILS • Agriculture
Argentinian insurer Sancor Seguros has invested an undisclosed amount in start-up reinsurer Ensuro. Ensuro, founded in 2021, is using blockchain technology to provide a new source of capacity for parametric insurance. CatX, a risk exchange start-up focused on alternative capital and parametric risk transfer, has raised $2.7 million USD in seed funding. CatX, founded in 2023, recently participated in investor Y Combinator’s Summer 2023 accelerator programme. Igloo, founded in 2016, has raised $36 million USD in pre-series C funding. Igloo is focused on embedded insurance in Asia and recently launched parametric weather insurance for farmers in Vietnam.
Partnership to develop parametric health insurance products
Health • Blockchain
Healthcare technology company VerityCare has partnered with parametric insurance start-up Etherisc to design parametric health insurance coverage. There are not many details yet, but it looks like data gathered by VerityCare could be used to trigger automated insurance pay-outs. The companies suggest this would allow faster pay-outs and lower administrative costs than traditional health insurance.
Australia backs Vietnam parametric scheme with $200k
Vietnam • Agriculture • Weather
The Australian government has partnered with parametric technology company Hillridge and insurer Mitsui Sumitomo to design parametric coverage for farmers in Vietnam. Australia has contributed $300,000 AUD ($200,000 USD) to the project. It aims to support farmers in the Mekong Delta region with protection against climate risks such as droughts, floods and typhoons.
Find out what you’ve missed…
Issue 61 – Why the parametric insurance market grew in 2023
Issue 60 – Why parametric insurance suits shock events
Issue 59 – Why brokers are launching parametric teams
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