Parametric insurance: a growth opportunity for Lloyd’s?

Thought for the day… parametric insurance: a growth opportunity for Lloyd’s? 

In recent years, parametric insurance has principally been adopted where there is demand for coverage, but traditional insurance is not available or cover is insufficient. Parametric could therefore be seen as a natural fit with Lloyd’s of London, the marketplace that covers some of the world’s most complicated and unusual risks that local insurance markets reject.

The parametric insurance market today, however, is dominated by continental European (re)insurers in terms of premium volume, with the Lloyd’s Market playing a smaller role. This is partly down to risk aggregation. Whilst a significant proportion of parametric deals cover hurricanes and earthquakes in North America, Lloyd’s syndicates are already highly exposed to catastrophes in that part of the world. Around half of the premiums written at Lloyd’s cover North American risks, skewed towards insurance for the riskiest properties and catastrophe reinsurance. For many Lloyd’s syndicates, the priority is diversifying away from earthquake and hurricane risks rather than taking on more.

But as parametric insurance is applied to more categories of risk around the world, the Lloyd’s Market is taking on a more important role. Arbol recently partnered with Beazley to start underwriting US weather risks, such as temperature and rainfall, at Lloyd’s. Several alumni of the Lloyd’s Lab Accelerator innovation programme, such as Otonomi and OTT Risk, have secured capacity from Lloyd’s insurers for new parametric products. The Lab’s latest cohort started this week, with participants Floodbase, Suyana and Benchmark Labs focusing on parametric.

The good news is that at least eleven Lloyd’s insurers are now providing lead capacity for parametric products, often through partnerships with MGAs that start small and scale up if successful. In this week’s Parametric Post, a start-up has received preliminary approval to launch the first Lloyd’s syndicate dedicated to parametric. Lloyd’s has also announced a partnership with the United Nations Capital Development Fund (UNCDF) to advance the UNCDF’s insurance programmes in climate-vulnerable countries, which have so far been focused on parametric coverage in the Pacific. As the parametric insurance market grows, so does the opportunity for Lloyd’s insurers to benefit.

CelsiusPro acquires Global Parametrics

Climate • InsTech Interview 

Mark Rueegg, Founder & CEO of CelsiusPro, tells us why the company chose to acquire Global Parametrics, what the deal means for the companies’ clients and partners and how he sees the role of parametric risk transfer in climate change ‘loss and damage’ discussions.

In the news…

Public-private partnership develops parametric product for city

Colombia • Flood • Earthquake

The densely populated city of Medellín in Colombia is exposed to floods, earthquakes and landslides. Broker WTW and reinsurer Hannover Re have completed a project with development organisation Global Communities to design a bespoke insurance product covering these risks. Pay-outs could be used for critical infrastructure repairs or distribution of aid to affected communities. It is now up to the Medellín Administrative Department of Disaster Risk Management to decide whether to purchase the coverage.

Arbol: navigating low temperature and freeze risks

Temperature • Agriculture

Frost can lead to large reductions in crop yields, with effects throughout the supply chain. Arbol’s latest blog post describes how parametric insurance can be structured to cover low temperature risks for the agriculture sector, with a hypothetical case study for a vineyard.

Blink Parametric travel solution expands to LatAm with baoba

Latin America • Travel

Travel assistance company Continental Assist has partnered with start-up baoba to enable its customers in Latin America to access parametric flight disruption insurance. The parametric solution, partly powered by technology company Blink Parametric, provides cash compensation or lounge vouchers to travellers facing disruptions of three hours or more. Instant coverage for flight disruptions is rapidly becoming one of the more established uses of parametric insurance.

Aon: the three sources of capacity backing parametric deals

Investment 

Aon’s Head of Parametric Cole Mayer describes three categories of investors that are providing capacity in the parametric market. Insurance-linked securities investors continue to back parametric structures; (re)insurers are increasingly putting capacity into parametric; and private equity funds are now deploying capital to parametric too through partnerships with insurers, MGAs or ILS funds.

Generali expands parametric partnership with UNDP

Malaysia • Climate

Insurer Generali Global Corporate & Commercial has partnered with the United Nations Development Programme (UNDP) from April 2022 to develop parametric solutions for vulnerable communities. Generali and the UNDP have launched an ‘insurance innovation challenge fund’ to incentivise new insurance products in Malaysia. The organisations say they will create a parametric programme that aligns with the UN’s ‘Sustainable Development Goals’ in the coming months.

Preliminary approval for parametric syndicate at Lloyd’s

UK

Continuing our theme on the adoption of parametric by Lloyd’s, start-up NormanMax Holdings has received preliminary approval to launch a Lloyd’s syndicate, known as Syndicate 3939, in partnership with Apollo Underwriting and GC Securities, according to The Insurer. The proposed syndicate would be dedicated to parametric insurance. NormanMax is led by Brad Meier, who is also the CEO of parametric MGA New Paradigm Underwriters.

Cyclone Freddy triggers pay-out to Mozambique government

Mozambique • Hurricane

The National Institute of Disaster Management of Mozambique received a pay-out earlier in 2023 when its parametric policy was triggered by Cyclone Freddy. The policy is backed by reinsurer Africa Specialty Risks, with CelsiusPro providing the risk modelling and acting as the calculation agent. Cyclone Freddy made landfall twice in Mozambique on 24 February and 11 March and broke the record for the longest-lasting tropical cyclone worldwide.

Earthquake risk and managing the ‘grey swan’

Earthquake 

Broker Aon is running a webinar on 11 October about parametric solutions for earthquake risks and managing ‘grey swan’ events. Unlike ‘black swans’ which are completely unexpected, grey swans are events which are considered unlikely but are known to be possible and would have a significant effect if they did occur. The webinar will consider how the parametric market can help close the earthquake protection gap and how parametric can apply to emerging grey swan risks.

Lloyd’s and UNCDF aim to expand access to climate insurance

Pacific • Climate

The Sustainable Markets Initiative’s Insurance Task Force, an industry group chaired by Lloyd’s, has partnered with the United Nations Capital Development Fund (UNCDF) to help provide disaster insurance in climate-vulnerable countries. The partnership is initially focused on Fiji and Pacific Island countries, where the UNCDF is already implementing parametric microinsurance schemes.

Malawi uses drought cover to reinforce social safety net

Malawi • Drought

The government of Malawi is using parametric insurance from the African Risk Capacity, a multi-country risk pool, to back up its social protection scheme. Drought conditions, as measured by a ‘water requirements satisfaction’ index, will trigger pay-outs to the Malawi government. The pay-outs will fund the scaling up of Malawi’s Social Cash Transfer Programme to provide financial support to more households.

Honduras purchases parametric rainfall cover from CCRIF

Honduras • Weather

The government of Honduras has purchased parametric coverage for excess rainfall events from the Caribbean Catastrophe Risk Insurance Facility (CCRIF), a multi-country risk pool, for the first time. Honduras becomes the fourth Central American country to join CCRIF, which also covers nineteen Caribbean countries and three electric utility companies. Separately, CCRIF has announced a new product to protect water utility companies against extreme weather.

Find out what you’ve missed…

Issue 56 – Consolidation in the parametric insurance market

Issue 55 – Parametric reinsurance for emerging climate risks

Issue 54 – Parametric insurance for weather variability

Sign up here to receive the latest news, stories and insights on parametric insurance every two weeks.