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The InsTech perspective… parametric risk transfer enabling loss prevention
Whilst the principal role of insurance is to help people and organisations recover after a loss, measures that prevent losses from occurring benefit insurers and policyholders alike. In practice, loss prevention is expensive and insurers may lack enough incentive to invest in measures that reduce their policyholders’ risk.
Carolyn Kousky, Associate Vice President for Economics and Policy, Environmental Defense Fund, explained on InsTech podcast episode 243 that whilst public sector insurance programmes often offer grants to policyholders to fortify their homes against catastrophic risks, this has not been achieved in the private insurance sector. Public sector programmes benefit from reduced claims and reinsurance costs in the long term, whereas private insurers that invest in loss prevention may not benefit if their policyholders switch insurers.
Guy Carpenter, in collaboration with Queen Mary University of London’s Dr. Franziska Arnold-Dwyer, has proposed a new financial instrument, the Climate Resilient Development Bond (CRD Bond) as a solution to this problem. It combines parametric risk transfer with financing for loss prevention projects to help communities become more resilient to climate events.
The CRD Bond structure focuses on a community vulnerable to a climate-related risk, such as flood or hurricane. The local municipality purchases parametric insurance against the peril on behalf of its community; any pay-out would be distributed as grants to affected citizens. It also plans a loss prevention project, such as building flood defences or renovating homes with hurricane-resistant roofs.
The insurer reinsures the municipality’s risk using an insurance-linked security (ILS) mechanism, whereby capital markets investors can earn interest by taking on the risk. If the parametric trigger is met, the insurer pays the municipality and is fully reimbursed by investors’ funds. Meanwhile, some of the investors’ funds are also used to finance the loss prevention project.
While more communities and businesses are now adopting parametric insurance to help them recover after catastrophes, insurance is only part of improving resilience. The CRD Bond is just the latest example of how parametric insurance products can be integrated with mitigation measures to help minimise and prevent loss.
Cyber • ILS • InsTech article
To underwrite more cyber risks, insurers need new sources of reinsurance capacity. Insurance-linked securities (ILS) allow insurers to access capacity from capital markets. Although parametric triggers have been considered for cyber risks, most early examples of cyber ILS transactions have used indemnity triggers. InsTech’s latest article looks at major recent transactions and considers what insurers and technology companies should take into account when structuring and bringing to market cyber ILS transactions.
In the news…
US • Hurricane • InsTech podcast
Parametric insurance technology company Raincoat has launched a parametric hurricane microinsurance product in Puerto Rico with Popular Insurance. Individuals can buy up to $3,000 USD of coverage online. Pay-outs are triggered by data from the National Hurricane Center. Popular Insurance is an affiliate of Puerto Rican bank Banco Popular, which participated in Raincoat’s seed funding round in 2022. To learn more about Raincoat, hear from Co-founder and CEO Jonathan Gonzalez on InsTech podcast episode 183.
Hurricane • Cyclone • Typhoon
Modelling firm Reask, founded in 2018, has raised $4.6 million USD in a seed funding round, bringing its total funds raised to date to $6.55 million USD. Reask’s tropical cyclone data and models are used in designing and triggering parametric insurance policies. Reask plans to use the funding to expand its range of models. Look out for InsTech’s upcoming podcast episode with Head of Parametric Products David Schmid to learn more about Reask.
UK • Travel • InsTech interview
Getcover.com, a trading name of Newpoint Insurance Brokers, will provide parametric flight disruption coverage to policyholders of its ‘Gold Tier’ policies through a partnership with technology provider Blink Parametric. If a policyholder’s flight is delayed by two hours or more, they receive an airport lounge pass or £30 GBP cash pay-out. The product is underwritten by insurer Financial & Legal. To learn more about Blink Parametric, you can read our recent interview with Chief Commercial Officer Carl Carter.
US • Business interruption • Terrorism
MGA New Paradigm Underwriters has announced that Lloyd’s syndicates AEGIS London and Talbot Underwriting are providing capacity for its parametric terrorism insurance product. The product pays out when terrorist events occur within a radius of an insured location, or at other key locations where attacks would cause a business interruption loss, such as an airport or power station. New Paradigm is providing coverage limits of up to $50 million USD.
Hurricane • Blockchain • InsTech podcast
Arbol, which underwrites parametric climate and weather insurance, has announced that its “dRe” platform is live, allowing parametric reinsurance transactions to use blockchain-based smart contracts. Arbol already uses blockchain technology for parametric insurance and it has worked with The Institutes RiskStream Collaborative, an insurance industry consortium focused on blockchain technology, to extend this to reinsurance, initially for named storms. To learn more about Arbol, hear from Founder and CEO Sid Jha on InsTech podcast episode 208.
US • Typhoon
US territory Guam experienced strong winds and heavy rainfall when Typhoon Mawar passed it on 24 May, causing physical damage, power outages and water supply issues. Martin Hotz, Head of Parametric Nat Cat, Swiss Re Corporate Solutions, says Swiss Re made pay-outs to parametric policyholders within three weeks.
Climate • InsTech article
The Global Shield, a climate insurance initiative announced at COP27, has launched the Global Shield Solutions Platform, which will fund climate risk finance and insurance solutions in vulnerable countries. You can learn more about the Global Shield in InsTech’s article, “Parametric initiatives at COP27: what you need to know”.
Skyline Partners to use satellite data for new lines of business
Marine • Aviation • Agriculture
Skyline Partners, which specialises in creating and operating parametric insurance solutions for insurers and brokers, has announced a partnership with Spire Global, a satellite data provider. Spire uses satellites to collect information on weather, shipping activity, flight tracking and climate variables. Skyline plans to use this data to develop new parametric products for the marine, aviation and agriculture sectors.
XS Global enters Florida parametric market
US • Hurricane
MGA XS Global, which has underwritten parametric natural catastrophe coverage in the Caribbean and Latin America for several years, is now expanding to Florida. It will offer parametric hurricane insurance to medium-sized enterprises, retail businesses, high-net-worth individuals and luxury homeowners.
Warm winter triggers $12.9m pay-out to energy company
US • Energy • Temperature
Star Group, an energy company operating in 19 US states, has received a pay-out of $12.9 million USD from a weather derivative following warm weather in New York City in the first quarter of 2023. 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. Energy companies such as Star Group use temperature derivatives to hedge against the risk of lower revenues from decreased energy usage in warm weather.
$32m Puerto Rico parametric cover fulfils FEMA requirements
US • Hurricane • Earthquake
The government of Puerto Rico has purchased a parametric insurance policy providing it with $32 million USD of coverage against hurricanes and earthquakes. It bought this coverage to provide quick funds to respond after a catastrophe and comply with US Federal Emergency Management Agency (FEMA) requirements. To be eligible for financial assistance from FEMA after a disaster, the agency requires that territorial governments and other public bodies are covered by sufficient insurance.
Mitsui Sumitomo and Hillridge launch Vietnam drought cover
Vietnam • Drought • Agriculture
Hillridge Technology, which develops parametric weather and catastrophe insurance products focused on the agriculture sector, has agreed a partnership with insurer Mitsui Sumitomo Insurance Group (MSIG) in Vietnam. MSIG will offer parametric drought insurance through Hillridge’s platform to Vietnamese farmers. Hillridge already works with MSIG to provide weather insurance to farmers in Australia.
Drought insurance pilot in Kyrgyzstan covers livestock farmers
Kyrgyzstan • Agriculture • Drought
The Kyrgyz Forum of Agriculture Advisory Services has purchased $1.19 million USD of parametric coverage to support 4,500 vulnerable livestock farming families in the event of a drought. The United Nations World Food Programme worked with technology company Blue Marble on the coverage, which is backed by capacity from local insurer A Plus and reinsurer Zurich.
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