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Why parametric insurance suits shock events – The Parametric Post Issue 60

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

The InsTech perspective… why parametric insurance suits shock events

Hurricane Otis caught people and businesses off guard when it made landfall in Acapulco, Mexico on 25 October as a category 5 hurricane. Just 24 hours earlier, it had been a category 1 storm. The hurricane caused dozens of deaths and, according to Fitch Ratings, up to $16 billion USD in total economic losses.

There are few precedents for hurricanes strengthening this quickly. Modelling firm Reask has generated millions of realistic synthetic events to understand the probability of future rapidly intensifying storms. Reask estimates that with today’s levels of global warming, an event like Hurricane Otis, where a storm’s wind speed increases by at least 50m/s in 24 hours within 250km of Mexico’s Pacific Coast, would have a return period of 1 in 31 years. Climate change has already made these events more frequent than in the past, and under a 2°C warming scenario, these become 1-in-25-year events.

Households, organisations and governments face immediate expenses after a hurricane, especially severe hurricanes at short notice. Utilities such as water and power may be more disrupted if there has been less time to reinforce critical infrastructure before landfall. Emergency services usually set up shelters and position supplies and personnel when a strong hurricane is expected; with less preparation they cannot respond as quickly. For businesses, less time to secure buildings means more physical damage, greater cost to restore their premises and longer before they resume trading.

Unlike traditional insurance, parametric policies can pay out within days of complex catastrophe events, which makes parametric insurance especially useful to cover immediate costs. It’s encouraging that some parametric policies have already paid out to those affected by Hurricane Otis, with a few examples in this issue. As these rapidly intensifying events become more frequent, parametric insurance can play a more important role in helping households and organisations recover.

In the news…

Blink Parametric partners with MAPFRE subsidiary

Ireland • Travel disruption

MAWDY, part of insurer MAPFRE Group, has partnered with Blink Parametric to integrate parametric solutions across MAWDY’s global network of travel insurance products and brands. Initially, MAWDY Ireland’s travel insurance customers will receive access to a lounge or cash pay-out automatically if their flight is disrupted for more than three hours.

Raincoat enables pay-outs to Hurricane Otis victims

Mexico • Hurricane • InsTech podcast

Technology company Raincoat, which designs and operates parametric disaster insurance programmes at scale around the world, has processed pay-outs for insured individuals in Mexico affected by Hurricane Otis. Raincoat’s Co-founder and CEO Jonathan Gonzalez explained how the company is collaborating with brokers and insurers in InsTech podcast episode 268.

Community-based flood insurance: implementation lessons

US • Flood

Flash flooding is another type of shock event that parametric insurance can cover, but creating affordable and effective parametric flood coverage can be challenging. The Environmental Defense Fund has published a report about the parametric flash flood coverage it designed for low-income residents of New York City with Swiss Re, Guy Carpenter and others. The report sets out the different trigger mechanisms the organisations considered and what they settled on, factors to weigh when choosing between an insurance contract or a derivative and other implementation lessons for community-based disaster insurance.

Floodbase partners with Ag Guard on parametric flood

Australia • New Zealand • Flood

MGA Ag Guard has worked with Floodbase to design and provide data for parametric flood insurance programmes across Australia and New Zealand. Farmers will be able to purchase parametric flood insurance from Ag Guard with pay-outs triggered by flooding magnitude over a large area.

Case study: pay-outs for WTW fertiliser cost product

Australia • Agriculture • Weather

WTW says sugarcane farmers have previously received pay-outs on its parametric ‘Nitrogen Risk Insurance’ product, launched in Queensland, Australia in 2022. Nitrogen fertiliser costs in Australia have doubled in the last year and farmers that use less fertiliser risk reduced yields depending on weather conditions. WTW’s insurance product is designed to cover the risk of yield shortfall, using data on temperature, rainfall and solar radiation to trigger pay-outs. Liberty Specialty Markets is providing insurance capacity.

Otonomi case study: insuring aircraft part deliveries

Aviation • Supply chain • Business interuption

MGA Otonomi has published a case study about how parametric freight delay insurance could help the aircraft parts sector. If an aircraft is unable to fly due to a damaged component, any delays in receiving a replacement part increase business interruption losses. Otonomi’s parametric policies pay out if the arrival of cargo such as aircraft parts is delayed.

Baloise launches parametric travel covers in Switzerland

Switzerland • Travel disruption

Insurer Baloise has added three parametric covers to its travel insurance offering in Switzerland: flight disruption, baggage delay and weather insurance. Baloise is using technology from Blink Parametric and Wetterheld. Policyholders receive compensation automatically for delayed or cancelled flights, lost luggage or bad weather on their holiday. These covers are the main parametric solutions being used in travel insurance today; Baloise is the first insurer we know of to offer all three.

$40m Japan earthquake catastrophe bond issued

Japan • Earthquake • Catastrophe bond

White Rock Insurance, managed by Aon, has issued a catastrophe bond for $40 million USD for an unknown sponsor. The bond will provide coverage against losses from earthquakes in Japan using a parametric trigger.

Parsyl’s vaccine monitoring recognised by US State Department

US • Africa • Supply chain

Parsyl, which provides cargo insurance and monitoring technology for temperature-sensitive supply chains, has won the 2023 Secretary of State’s Award for Corporate Excellence (ACE). The award relates to Parsyl’s work monitoring vaccine supply chains in Côte d’Ivoire and across the African continent. 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.

Hurricane Otis triggers Mexico’s parametric cat bond

Mexico • Hurricane • Catastrophe bond

The government of Mexico has a parametric catastrophe bond providing it with $485 million USD of hurricane and earthquake coverage, including $125 million USD of cover for hurricanes on its Pacific Coast. Hurricane Otis has triggered a pay-out of at least $31.25 million, and possibly up to $62.5 million USD, depending on the final calculations of the hurricane’s central pressure. Verisk (AIR Worldwide) is the calculation agent for the bond.

$286m parametric policy could add to Mexico’s Otis recovery

Mexico • Hurricane

In addition to its catastrophe bond, Mexico’s government has revealed it is covered by a parametric catastrophe insurance policy with a limit of $5 billion MXN ($286 million USD). The country’s deputy finance minister implied in a press conference that he expected a pay-out, saying funds from the policy could be used to aid reconstruction efforts in affected areas.

How is parametric insurance defined in law?

Legal 

Law firm DLA Piper has published a guide to laws concerning parametric insurance in 42 jurisdictions. The firm identifies just four jurisdictions that define or mention parametric insurance explicitly in law. It finds no known significant litigation yet relating to parametric products. Since most countries’ insurance legal frameworks are based on the principle of indemnity, we believe future disputes around the nature of the product or trigger mechanisms are possible.

FloodFlash pays claims after UK’s Storm Babet

UK • Flood

Parametric flood MGA FloodFlash has paid several claims following Storm Babet, which hit the UK in late October 2023. Pay-outs of between £10,000 and £500,000 GBP were triggered to companies including a large manufacturing site. FloodFlash, which is backed by insurance capacity from Munich Re and Hiscox, says the claims were paid in full within two weeks.

Management buyout and platform launch at Parameter Climate

Climate 

The management team of parametric insurance MGA and advisory firm Parameter Climate has bought out reinsurer SiriusPoint’s stake in the company. SiriusPoint invested in Parameter Climate in 2021. It was reported this year that SiriusPoint intended to sell its entire portfolio of MGA investments. The reinsurer says it will continue to provide capacity to Parameter Climate after the buyout. Parameter Climate has also launched its risk analytics platform ClimateDelta, which it offers to buyers and sellers of parametric risk transfer.

SRS-backed MGU to launch with parametric offerings in 2024

Switzerland 

Broker and captive manager Strategic Risk Solutions (SRS) has announced a new subsidiary, SRS Altitude. SRS Altitude, a managing general underwriter (MGU) based in Switzerland, will launch in 2024 to offer parametric and other alternative risk transfer products to corporates.

AXA hybrid policies pay out to SMEs after Hurricane Otis

Mexico • Hurricane

Earlier in 2023, AXA Mexico started offering its business insurance customers a free parametric hurricane benefit, ‘Ayuda Express Huracán’. Those who signed up for Ayuda Express Huracán would receive $10,000 MXN ($570 USD) within 72 hours after a hurricane, depending on data reported by the US National Hurricane Center. AXA Mexico’s CEO says the insurer has already paid out to businesses affected by Hurricane Otis under this policy and also paid out after Hurricane Lidia earlier in October.

Ping An expands marine carbon sink cover to mangroves

China • Carbon • Agriculture

Chinese insurer Ping An has designed a ‘mangrove carbon sink index insurance’ policy, covering mangrove forests against changes in the marine environment that affect their ability to absorb carbon dioxide. Mangrove forests are considered ‘carbon sinks’, meaning that they absorb more carbon than they release. Ping An’s carbon sink index is designed to measure a mangrove forest’s ability to absorb carbon dioxide. When extreme weather, abnormal temperatures or other changes in the marine environment reduce the carbon sink effect, a pay-out is triggered to fund efforts to restore the carbon sequestration ability. Ping An has previously underwritten similar carbon sink insurance policies for oceans, seagrass beds and oyster farms.

India invests $700k in expanding parametric insurance in Fiji

India • Fiji • Climate

The United Nations Capital Development Fund introduced a parametric cyclone microinsurance product in Fiji in 2021. The product covers smallholder farmers, fishers and market vendors. Rainfall triggers were added in 2022. The Indian government’s investment of $1.6 million FJD ($700,000 USD) aims to scale the programme further to cover 5,000 households in the next cyclone season (November 2024 to April 2025).

Pacific Re expands parametric underwriting, backed by SCOR

Pacific • Reinsurance

Pacific Re already provides reinsurance to parametric microinsurance schemes in Fiji and Samoa. It has now secured retrocession (reinsurance for reinsurers) support from SCOR to underwrite parametric reinsurance in more Pacific Islands countries including Vanuatu, Solomon Islands, Kiribati, Tuvalu, Tonga and Papua New Guinea.

Find out what you’ve missed…

Issue 59 – Why brokers are launching parametric teams

Issue 58 – Parametric insurance: not just for physical losses

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

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