Parametric insurance: not just for physical losses – The Parametric Post Issue 58

Thought for the day… parametric insurance: not just for physical losses 

Recent events such as the COVID-19 pandemic, supply chain pressures and variable weather have revealed businesses’ exposure to risks that cause loss without physical damage. These ‘non-damage business interruption’ (NDBI) risks usually are either not covered by insurance or subject to a painful claims process. Many of these potential losses are well suited to parametric insurance, which responds quickly to defined events.

Holiday resorts suffer revenue drops after natural catastrophes, even if there is no physical damage to the property, as tourists cancel trips or are prevented from reaching their destination by damaged infrastructure. Outdoor event organisers make less money when it pours with rain. Shops cannot open if damage to local utilities causes a power outage. Large-scale bird flu outbreaks disrupt the food supply chain and can make it near-impossible for chicken restaurants to trade.

As well as drops in revenue, parametric insurance can also cover unexpected increases in costs. If the Rhine’s water levels drop so low that it becomes impassable for shipping, logistics companies need to organise rail or road transport for goods at greater cost. After heavy snowfall, local authorities have to spend more on snow removal to maintain transport networks. Film production companies face increased costs if they have to reschedule filming due to bad weather, especially if it involves the highest-paid actors.

In November, we will be releasing an InsTech report on how parametric solutions can be used to cover all these and more non-physical losses. The report will look at which industries are already using parametric insurance for NDBI losses today, the new products being developed and the relevant data and models. Interested in learning more or featuring your company’s solution in the report? Get in touch via [email protected].

Raincoat: enabling parametric protection that scales

Climate • InsTech podcast 

What do consumers really think about parametric insurance? Jonathan Gonzalez, Co-founder and CEO of Raincoat, returns to the InsTech podcast to share lessons from operating parametric programmes at scale around the world. Raincoat works with insurers, brokers and reinsurers to develop and distribute parametric insurance to individuals and businesses exposed to disasters.

Parsyl: insuring perishables – bridging the data divide

Supply Chain • Temperature • InsTech podcast 

MGA Parsyl provides a temperature-related parametric cover as an option on its cargo insurance policies, protecting sensitive cargo such as medicines and seafood against increases in temperature during transit. Parsyl’s Chief Insurance Officer Gavin Spencer joins InsTech podcast episode 265 to discuss the company’s growth and the data that is used to define a loss.

In the news…

Swiss Re: how captives can absorb parametric basis risk

Captives 

‘Basis risk’ is the potential difference between a policyholder’s financial loss and the pay-out they receive from their insurer. For corporations purchasing parametric insurance, basis risk means that their claim payment may not cover the full loss they experience in a catastrophe. Reducing basis risk is critical for organisations to be comfortable purchasing parametric insurance.

Swiss Re Corporate Solutions’ Thomas Keist and Jan Bachmann have written about how captive insurers can be used to manage basis risk with parametric insurance. Captive insurers are subsidiaries of large organisations and provide insurance to their parent company. The authors describe how a captive could provide traditional catastrophe insurance to its parent, paying claims based on the assessed loss from each event, whilst purchasing parametric reinsurance which would reimburse the captive with predefined amounts based on the severity of the catastrophe.

Otonomi: air cargo delay protection for logistics firms

Supply chain • Business interruption 

Continuing our theme of non-damage business interruption, Otonomi’s Charlie Schaper sets out seven reasons why logistics firms face delays in air cargo. Where goods are not delivered on time, businesses could face increased cost or decreased revenue. Otonomi, an MGA, is offering parametric insurance for air cargo delays with capacity from reinsurer Greenlight Re.

WTW plans more parametric covers for emerging climate risks

Climate 

Simon Young, Senior Director, Disaster Risk Finance and Parametrics at broker WTW, discusses some of the parametric programmes WTW is working on. WTW has already placed parametric insurance for the Mesoamerican Reef in the Caribbean Sea and coral reefs around Hawaii and is now working on a parametric coral reef cover in Fiji. WTW also hopes to launch a pilot parametric solution for fishers in the Philippines in 2024, with similar programmes planned in Indonesia, several Pacific Islands and the Caribbean.

Liberty provides parametric cover for farmer’s glasshouse

Australia • Wind • Agriculture

Insurer Liberty Specialty Markets has created a parametric solution for a tomato grower in Australia, protecting its $4 million AUD ($2.6 million USD) glasshouse from wind damage. The policy pays out within 14 days if wind speed exceeds 100 kilometres per hour.

BCAA launches Blink Parametric travel disruption cover

Canada • Travel

Blink Parametric’s technology is being used by Canadian broker British Columbia Automobile Association (BCAA). Customers can choose cover for flight disruption and lost or delayed luggage when purchasing single trip travel insurance policies from BCAA. Policyholders receive agreed payments or access to lounges if flights are delayed by more than two hours or their luggage is delayed or lost.

Aon: why to talk parametric in your next renewal conversation

Renewals 

Risk managers are increasingly using parametric solutions to cover natural catastrophes and other risks. Aon’s recent article sets out why businesses should consider parametric solutions to supplement traditional insurance, cover NDBI losses or address new exposures.

Case study: parametric flood insurance pays out in Nepal

Nepal • Flood

In 2022, a parametric flood insurance scheme in Nepal was extended to cover 4,278 farmers across 12 cooperatives. This case study focuses on one of the farmers who received a pay-out of $27 USD after high water levels earlier in 2023. The scheme is run by the charity Practical Action, Z Zurich Foundation (the nonprofit arm of Zurich Insurance Group), local insurer Sikhar Insurance and Global Parametrics (now part of the CelsiusPro Group) among others.

Raincoat wins $125,000 funding in climate competition

US • Climate

Parametric technology company Raincoat is one of four start-ups awarded $125,000 USD in funding from telecommunications company Verizon. The award is part of Verizon’s Climate Resilience Prize, which funds projects that help mitigate the impact of climate change on vulnerable communities in the US.

Fiji government purchases $10m cyclone cover from PCRIC

Fiji • Cyclone • Weather

The government of Fiji has signed a commitment to purchase parametric tropical cyclone insurance from the Pacific Catastrophe Risk Insurance Company (PCRIC). The policy, which will cover the 2023-24 South Pacific cyclone season, triggers pay-outs if a category 3 or above cyclone passes through or near certain coastal areas. The premium is estimated to be $1.5 million USD, with around $10 million USD of coverage, depending on reinsurance which has not yet been finalised.

Parametric helps Taiwan’s agriculture insurance market grow

Taiwan • Agriculture

The agriculture insurance coverage rate in Taiwan has increased from less than 6% in 2017 to more than 51% in June this year. According to the Asia Insurance Review, one reason for the growth is the introduction of new agriculture insurance products, including parametric coverage using typhoon wind speeds, rainfall or temperature as an index. The parametric products have been used to cover fish farms and growers of fruits including watermelons, pomelo, jujube and Java apple.

Find out what you’ve missed…

Issue 57 – Parametric insurance: a growth opportunity for Lloyd’s?

Issue 56 – Consolidation in the parametric insurance market

Issue 55 – Parametric reinsurance for emerging climate risks

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