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The InsTech perspective… new ways to combine parametric and indemnity covers
Parametric insurance usually complements indemnity-based insurance rather than replacing it. In December 2021, we wrote about a trend we predicted for 2022: the emergence of ‘hybrid’ policies which combine elements of parametric and indemnity-based covers in one policy.
For example, Vave’s new commercial property insurance policies for small and medium businesses in the US include parametric extreme temperature cover for non-damage business interruption losses. Súper has recently launched a home contents insurance product in Mexico with a parametric earthquake cover to assist with people’s immediate expenses after an earthquake.
Arbol’s Sid Jha tells us about a new example of parametric and indemnity covers being combined in InsTech podcast episode 208. In Florida, the property insurance market is experiencing a crisis where most of what is paid out in claims is spent on litigation. According to the Florida Office of Insurance Regulation, of the $51 billion USD paid in claims in the last decade, just 8% went to claimants. Sid told us that a lot of the litigation was focused around roof damage caused by strong winds. Arbol is working on hybrid parametric policies “where the bottom of the house is traditionally adjusted, but the roof pays based on parametric, using hurricane tracks and wind speeds… this severely reduces the litigation risk.”
Parametric covers are often combined with indemnity covers to fill the gaps left by deductibles, low limits and exclusions, but they can also be used to cover specific risks, such as wind damage to roofs, where it is difficult to provide indemnity-based coverage. Parametric cover is increasingly being viewed as a tool that can be applied within all sorts of insurance policies, not just a standalone product.
Climate • InsTech interview
Co-founder and CEO Tristan Fletcher discusses how ChAI forecasts commodity prices, and why it is building a parametric insurance product to help companies manage their commodity price risks. You can read the full interview to find out about demand for commodity price risk insurance and how the product would work in practice.
In the news…
Cyber • Catastrophe bonds
Cyber reinsurance MGA Envelop Risk has launched Envelop Capital Markets, an insurance-linked securities (ILS) practice. Insurance-linked securities are financial instruments that allow insurers and reinsurers to transfer risks to capital markets. There have been few cyber ILS transactions so far but there is high interest in transferring systemic cyber risks to capital markets. Envelop Capital Markets plans to bring new sources of capital to the cyber reinsurance market while developing and underwriting indemnity-based and parametric risk transfer structures for cyber risks.
Philippines • Typhoon • Humanitarian aid
Start Ready, a parametric risk pool set up at COP26 to provide funding to aid agencies when a climate shock is predicted, has received a grant from the Swiss Re Foundation, the social value arm of reinsurer Swiss Re. Start Network, the organisation behind Start Ready, says that 55% of humanitarian crises are predictable, but less than 1% of humanitarian funding is given in anticipation of a crisis occurring. $700,000 USD in funding from Swiss Re will be used to scale up the Start Ready project in the Philippines, so that predicted typhoons can trigger pay-outs to local aid agencies. The Swiss Re Foundation is also contributing $200,000 USD to the Start Ready risk pool.
Climate • Blockchain
Decentralised climate data network dClimate has acquired Oasis Hub, an aggregator for catastrophe, extreme weather, climate change and environmental risk data. Oasis Hub’s data will become available on dClimate’s marketplace for climate data, forecasts and models. dClimate was built and launched by the co-founders and principal executive officers of Arbol, and its data is used in Arbol’s parametric insurance products.
US • Climate • Captives
Ryskex, which provides a marketplace for parametric risk transfer, has created a working group with several European funds to provide alternative capital to captive insurers. Ryskex says the group will cover climate change perils. A captive insurer is a subsidiary wholly owned by its parent company. The captive provides insurance for its parent company and companies within its group. A captive may buy parametric reinsurance against catastrophic and other risks which affect its portfolio.
US • Hurricane • InsTech podcast
IncubEx, a developer of exchange-traded environmental and sustainability products, plans to launch electronically-traded hurricane futures, a type of weather derivative, in 2023. Weather derivatives are tradeable financial contracts which are often used to hedge against weather risks. They are a form of parametric risk transfer, but unlike parametric insurance, weather derivatives are not regulated insurance products. Hurricane futures were traded on the Chicago Climate Futures Exchange from 2008 until they were delisted in 2011. You can learn more about IncubEx from our interview with Founder and Chairman Neil Eckert on podcast episode 191.
US • Travel • Weather
MGA Pattern Insurance has launched its weather protection insurance product for the US travel market. Designed to be embedded into travel distributors’ online systems, the insurance product protects travellers against forecasts of rain. If torrential rain is forecast days before a trip, travellers receive either a full refund or the ability to rebook for a later date. Several other companies have launched or plan to launch parametric travel rainfall products, but Pattern’s policy differs in that it pays out preemptively; forecasts of rainfall trigger pay-outs, rather than actual rainfall when it occurs.
Switzerland • Agriculture • Weather
Agriculture insurance consultancy Agri Risk Transfer has published a case study detailing how it designed a hybrid parametric/indemnity insurance product for large-scale farms. The product, sold by Swiss insurer Schweizer Hagel, includes indemnity-based hail coverage and parametric covers for lack of rain and excess rain.
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