Parametric insurance for weather variability – The Parametric Post Issue 54

The Parametric Post, the only newsletter dedicated to parametric insurance.

The InsTech perspective… parametric insurance for weather variability

Parametric risk transfer in its current form can be traced back to two financial instruments developed in the 1990s: catastrophe bonds and weather derivatives. Catastrophe bonds were created to cover losses from low-frequency, high-severity events such as hurricanes; weather derivatives were designed to hedge against the effects of variable temperatures, rainfall or other weather conditions on their revenues. Both are forms of parametric risk transfer but not regulated insurance products.

In recent years, more organisations have started to use parametric risk transfer to cover weather variability. Originally, weather derivatives were mostly used by energy companies to hedge against temperature risks. For example, in a warm winter, consumers use less energy, reducing revenue for energy companies. Now the growth of the renewable energy sector has led to new parametric products for different weather risks, such as policies insuring wind farms against lack of wind, or solar farms against lack of solar radiation. Swiss Re announces a new parametric policy for solar farms in this week’s issue.

Event organisers are using parametric insurance to cover lost revenue in poor weather, with one New York golf tournament receiving a pay-out after rain earlier this year. Revenues in the agriculture sector are also affected by rainfall, heat, temperature and other weather conditions. Many farms have purchased parametric policies to cover these risks, while international development organisations have frequently subsidised parametric insurance for smallholder farmers, whose livelihoods and food security are most affected by variable weather. In this issue, 14,000 farmers in Colombia are being protected against heat and excess rainfall.

Non-catastrophic weather events are also affecting insurance companies. Small losses from weather events are piling up across some insurers’ portfolios, even sometimes putting their credit rating at risk. The Demex Group recently described a case study of an insurer in the Midwest US experiencing this; Demex structured a parametric reinsurance policy to cover the losses.

Arbol, which has built its business on covering low-severity, high-frequency weather losses with derivatives and parametric insurance, has now transferred more than $1 billion USD in notional risk, illustrating the growth in the parametric weather market. As previously uncommon weather conditions become more frequent, driven by climate change, more organisations may look to parametric risk transfer to manage the impact of weather on their revenues.

In the news…

Arbol transfers more than $1bn in risk since 2020

Climate • Weather

Arbol has announced that since the company started offering parametric insurance and derivatives in 2020, it has transacted more than $1 billion USD in notional risk. Notional risk refers to the total limits of all the policies sold through its platform. Arbol specialises in covering climate and weather risks.

Swiss Re backs new parametric solar energy cover in Malaysia

Malaysia • Energy

Insurer Etiqa, supported by Swiss Re, has launched Solar Energy Shortfall Insurance (SESI) in Malaysia. This parametric insurance product offers protection based on an index for sunlight shortfalls, ensuring solar plant investors have more predictable returns. The coverage compensates solar farm operators when actual electricity output falls below a set threshold due to inadequate sunlight, excluding factors like machinery breakdowns.

OTT: short-term rental hosts leave platform after revenue drops

Business interruption

MGA OTT Risk’s latest blog post analyses how hosts in the short-term rental industry have experienced variable losses in revenue. Certain properties have witnessed a revenue drop of over 50%, affecting hosts’ ability to cover mortgage payments and other costs. This causes some hosts to leave short-term rental platforms. To help support those experiencing revenue drops, OTT Risk is offering parametric income protection for the users of sharing economy platforms such as short-term rental hosts.

$50m cat bond uses county-level industry loss index from Verisk

US • Hurricane • Catastrophe bond

MGA SageSure has purchased a fifth catastrophe bond for its captive reinsurer Anchor Re. Whilst its other catastrophe bonds have used indemnity-based triggers, its newest bond, covering US hurricane risk, uses a county-level industry loss index. If the insurance industry loss from a hurricane, weighted by county, is greater than a certain threshold, a payout is triggered. Verisk Property Claim Services will provide the industry loss data.

Golf tournament receives pay-out for lost revenue after rain

US • Weather • Event

The DICK’S Sporting Goods Open, a golf tournament held in New York in June, has received a parametric pay-out from Vortex Insurance Agency, a subsidiary of MSI GuaranteedWeather (owned by insurer Mitsui Sumitomo). It rained for two days of the event, triggering a pay-out to compensate for lost revenue. This is the second year parametric weather insurance has been purchased for the tournament.

Texas hospital buys $30m parametric wind cover

US • Hurricane

Citizens Medical Center, a hospital in Texas, has purchased $30 million USD of parametric hurricane insurance for the first time, alongside $5 million USD of traditional wind coverage, at its commercial property insurance renewal. The hospital suffered physical damage and power outages from Hurricane Harvey in 2017. It was paid a claim of $5.9 million USD under its traditional insurance policy, but only after resolving a dispute with its insurer. If a hurricane of the same category and track occurred now, the hospital would be paid $6.2 million USD under its parametric policy.

Insurer launches parametric cover for households in Mexico

Mexico • Hurricane

Insurer GNP Seguros is offering GNP Riesgos Naturales Huracán, a new parametric insurance product covering households and small businesses in Mexico against hurricane risks. Limits of between $10,000 MXN ($600 USD) and $50,000 MXN ($3,000 USD) are available. Pay-outs are triggered based on wind speed information from the US National Hurricane Center.

14,000 farmers receive fully subsidised weather insurance

Colombia • Agriculture • Weather

Bank Davivienda will subsidise 17% and rural development bank Finagro the other 83% of the premiums for 14,000 smallholder farmers in Colombia to be insured. The parametric policies cover excess rainfall and heat, measured by satellite data. Insurer Seguros Bolívar is underwriting the policies.

Broker BGC Group starts trading weather derivatives

Weather

BGC Group, a financial services company specialised in broking foreign exchange, derivatives, commodities and other assets, has hired two weather trading experts to enter the weather derivatives market for the first time. Weather derivatives are tradeable financial contracts that are 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.