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OTT Risk: a new approach to business interruption insurance

InsTech’s Henry Gale spoke to OTT Risk’s COO Quentin Saleur and Head of Business Development Matthew James about business interruption for the tourism sector, social unrest events and parametric approaches to risk transfer.

Member Spotlight: OTT Risk

What is the history of OTT Risk?

OTT Risk is a London-based MGA, with offices in the US and UK. It was founded in 2020, in the early days of the COVID-19 pandemic. OTT Risk’s purpose is to offer more comprehensive business interruption cover that pays claims quickly.

OTT Risk uses metrics such as credit card transaction data, hospitality metrics, footfall and transportation passenger data to measure the impact of business interruption events on companies, basing policies on those indices.

What are the shortcomings of traditional business interruption insurance products?

Traditional business interruption claims predominantly depend on the policyholder suffering physical damage to an insured asset. This does not account for intangible perils that affect consumer behaviour, such as pandemics, strike action, poor weather or nearby terror attacks.

These fortuitous events impact customer volume and affect a business’ viability. Also, large business interruption claims may take more than a year to be paid.

OTT Risk’s approach uses economic indices that correlate with business interruption losses to create a parametric insurance product. The product can cover intangible perils and provide faster pay-outs than traditional business interruption insurance.

In the last month we’ve seen Hurricane Ian batter Cuba and parts of the south-eastern US. Can you give an example of an industry that will suffer business interruption losses from this kind of event, even if businesses don’t experience physical damage?

Tourism-dependent businesses are highly seasonal. If hurricanes infringe on the critical travel window, budgets are quickly missed and liquidity challenged by mass cancellations, lower guest volumes and lost revenue for hotels, tour operators, airports, local retail and leisure companies.

For example, OTT Risk is discussing business interruption solutions with tour operators and hotels around the world, as well as project finance entities that plan to develop or acquire enterprises in tourist zones and need a comprehensive backstop linked to tourist volume metrics.

What solutions can OTT Risk structure to cover these losses for tourism-reliant businesses?

OTT Risk offers parametric cover triggered when hotel occupancy in defined locations or passenger arrivals into critical airports drop sharply and stay low for a sustained period. These are good proxies for the revenue losses suffered by businesses that depend on holidaymakers in the location.

OTT Risk works with the client to determine the index. The index should correlate with the client’s revenue, for example airport arrivals, hotel occupancy or revenue per available room (RevPAR) for a group of hotels, and can be measured monthly or quarterly depending on the client’s preference. OTT Risk monitors this index remotely using third-party data providers. A claim is paid if the index falls below a predefined threshold for any month or quarter. The client does not need to file a claim; OTT Risk can make the pay-out shortly after the index data becomes available.

Apart from natural catastrophes, what other loss events would this product respond to?

Other events that might reduce tourism volume and trigger a business interruption pay-out include local terror attacks or crime. Infectious disease events and government lockdowns can reduce tourism volume and even the fear of an infectious disease, such as Zika, can damage holidaymakers’ appetite to visit a location.

Sustained poor weather, strikes and civil unrest might also cause non-damage business interruption to tourism-dependent businesses; these are frequently left exposed by existing insurances.

More broadly, can you give examples of recent social unrest events that caused significant business interruption losses?

One example is the Gilet Jaunes protests in France. The violence caused physical losses for businesses, with around €200 million EUR paid in claims, but there were also sizeable business interruption losses largely not covered by insurance. According to the French government’s analysis, businesses suffered €2 billion EUR in revenue losses over seven months. Similarly, the 1992 Los Angeles riots caused roughly $1 billion USD in property damage and $4 billion USD in revenue losses.  From these two data points, it appears that business interruption losses are between four and ten times greater than physical damage during violent protests.

Even peaceful protests can cause large business interruption losses, for example if major transport links are blocked. The Canada convoy protest in early 2022 disrupted trade at a key supply chain bottleneck, causing trade losses of about $4 billion CAD. The fourth largest Canadian mall reported $70 million CAD in lost sales due to the protest.

What sectors are impacted the most by social unrest?

Any business that relies on footfall can be impacted by social unrest. Restaurants, retail stores and small businesses that are located close to protests are particularly impacted, either directly or through interrupted transport networks. Tourism-related businesses suffer the most, because people are less likely to travel to a country with high social instability.

Generally, smaller and medium businesses are the most at risk. Compared to larger companies, they tend to have less contingency planning and may have a less developed online presence, making them more reliant on in-person sales.

Is inflation increasing the risk of social unrest in parts of the world?

Hyperinflation and high fuel prices make social unrest more likely. Emerging markets have been a leading indicator for how inflation can drive social unrest. Sri Lanka, Indonesia and Turkey are experiencing inflation above 50% and generally a high level of social tensions. Sri Lanka has overthrown its government in July 2022, and protests in Indonesia are turning violent.

In Europe, the crisis in Ukraine and currency pressures driven by the US Federal Reserve’s monetary tightening continue to increase inflation and neither are expected to change soon. There is likely to be more social unrest until those two factors are resolved.

The insurance industry does not usually cover most geopolitical, macroeconomic and infectious disease risks. How can OTT Risk make these risks insurable?

Although OTT Risk can underwrite named peril policies for specific risks such as unrest or natural catastrophes, OTT Risk’s main underwriting approach is peril-agnostic. The policy would pay out when an index, such as hotel occupancy, drops below a certain threshold over a sustained period of time.

When underwriting and pricing the policy, OTT Risk needs to factor in all the events that might lead to a pay-out. This starts with looking historically at the index itself. Depending on the index, there may be up to 30 years of historical data available. This shows us what events would have triggered a pay-out historically, as we can recreate historical losses against the policy structure.

Secondly, OTT Risk looks at how the index correlates with other public and proprietary data sets. For example, when underwriting business interruption coverage to a resort on a tropical island using local hotel occupancy rates, that index will correlate with passenger arrivals to the island, the breakdown of tourists by home country and the disposable income in those countries, and so on. This helps with understanding what the trend in hotel occupancy will be going forward over the term of the policy, and setting an appropriate budget to cover with the client.

Thirdly, OTT Risk uses its proprietary models to estimate probability distributions for various perils such as pandemic, social unrest and terrorism. We look at the frequency, severity and duration of those types of events, and how they may impact the insured index, to construct the price.

Finally, financial markets data is used as a sanity check for underwriting. The financial markets are a good leading indicator for how specific sectors or geographies will be affected by various factors such as pandemics or geopolitical events.

What data providers does OTT Risk work with?

OTT Risk’s experience is that policyholders prefer to use data from a trusted third party as an index to underpin the insurance payment. This removes any conflict of interests. Our data partners include Mastercard, which provides card transaction data, Skytra, an FCA-regulated provider of air travel data globally, and STR, which provides hotel occupancy data.

OTT Risk is an MGA. What can you tell us about your insurance capacity?

OTT Risk does not have a traditional insurance capacity partner. When OTT Risk underwrites a policy today, it is usually issued by a fronting insurer that reinsures most of the risk back to OTT Risk’s own capital, or through an insurance-linked securities transaction. OTT Risk is actively looking to form capacity partnerships with insurers.

How does OTT Risk distribute its insurance products?

The products are primarily distributed through brokers, large and small. The broking community has been supportive, because they recognise the shortfalls of existing cover and what their clients need. As OTT Risk adapts its products for smaller and medium-sized businesses it will also explore other methods of distribution.

OTT Risk is focused on the UK, Western Europe, North America and the Caribbean, but is also open to underwriting in other locations where there is permissible insurance regulation and robust data.

OTT Risk is currently in cohort nine of the Lloyd’s Lab. What are you looking to achieve in the Lab?

OTT Risk’s goal for the Lloyd’s Lab is to work towards making OTT Risk’s products scalable and available to more businesses. This includes developing an ‘add-on’ product to sit alongside traditional insurances, offering a small sub-limited payment when a business interruption event impacts the neighbourhood. This serves as a liquidity hit, stemming the ultimate financial loss to the business but not prejudicing the workings of the main Business Interruption cover.

Why has OTT Risk joined InsTech as a corporate member and what companies would you like to connect with?

OTT Risk is pleased to be part of a community driving change in the insurance industry. InsTech’s community and content influence brokers and insurers and encourage them to innovate to benefit policyholders.

OTT Risk would like to connect with anyone who has supportive or constructive feedback on its products. The priority is speaking to insurers and brokers who could partner with OTT Risk to make the products more widely available.

For those who want to learn more about OTT Risk or are interested in a potential partnership, please send a message on OTT Risk’s website.

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