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The InsTech perspective… tornadoes: a peril to watch in parametric insurance
Fewer parametric insurance products are currently available for tornadoes than for other secondary perils such as flood, hail and wildfire. Tornadoes occur in many places worldwide, but the most violent tornadoes predominantly occur in the central United States. A US tornado outbreak in December 2021 caused $5.1 billion USD in total economic losses and $4 billion USD in insured losses according to Aon. It was the eighth costliest natural disaster event globally of 2021.
In the most exposed areas, tornado insurance is usually expensive and subject to large deductibles. (A deductible in an insurance policy is the amount of money that policyholders are responsible for paying towards an insured loss. In the event of an insured loss, the claim payment equals the insured loss minus the deductible.)
Parametric insurance is proving to be an appealing solution where individuals or businesses struggle to get adequate cover from the traditional, indemnity-based insurance market. MGA Descartes Underwriting describes in a recent white paper how a manufacturing plant experienced $10 million USD in losses from tornadoes in April 2020 before purchasing parametric tornado cover. Start-up Sola plans to launch a parametric tornado product for individuals in exposed areas of the US. The product would aim to fill the gap in coverage left by deductibles in homeowners’ insurance.
The Enhanced Fujita (EF) scale, a measure of tornado severity based on surveys of the damage caused, is one of the triggers used for parametric tornado insurance. In the US, the National Weather Service publishes EF ratings within a few days of a tornado.
With large insurance industry losses from tornadoes in recent years making it harder to get tornado cover in exposed areas, we expect more parametric solutions to emerge soon to fill the gaps.
In the news...
US • Climate • Captive
Arbol, which provides parametric climate and weather risk management solutions for businesses, has formed a captive insurer, Climate Risk Insurance Company. Arbol’s clients will be able to use the captive to manage their climate risks through a captive structure.
Some large corporations own captive insurers, which they use to self-insure. The captive provides insurance for its parent company and companies within its group. Insurance organisations can also set up captive insurers that are ‘rented’ out to other companies, allowing the companies to participate in their own insurance risk without managing the captive themselves. You can learn more about captives by listening to InsTech podcast episode 198 with Richard Cutcher from the Global Captive Podcast.
Arbol has also announced that it transacted more than $100 million USD in gross written premium in the first half of 2022. This is greater than the $70 million USD in premiums Arbol transacted in the whole of 2021. Look out for our upcoming podcast interview with Founder and CEO Sid Jha to learn more.
Wind • Flood
Catastrophe modellers Fathom and Reask have announced a partnership that initially involves each company being able to sell the other’s products and services. Global Parametrics uses Fathom’s flood maps for parametric flood covers, while Swiss Re Corporate Solutions and Descartes Underwriting use Reask’s wind speed data in parametric triggers. Fathom and Reask plan to collaborate in 2023 on hazard data maps and catastrophe models to help companies understand the combined risk of wind and flood events.
DACH • InsTech interview
Descartes Underwriting is opening an office in the Rhine-Main area of Germany to expand its coverage in the DACH region (Germany, Austria and Switzerland). Descartes, headquartered in Paris, already has offices in London, New York, Houston, Denver, Atlanta, Singapore, Sydney, Hong Kong and Madrid. It has raised $142 million USD to date, according to PitchBook. We interviewed Descartes for a member spotlight earlier this year.
US • Hurricane
AXA Climate, part of the AXA Group specialising in parametric insurance, has announced it will use data sets from RMS HWind for its US parametric hurricane insurance policies. RMS HWind provides high-resolution tropical cyclone analytics including historical data, forecasting and post-event footprints. Swiss Re Corporate Solutions also uses HWind for parametric hurricane triggers in the US and Caribbean.
US • Snow
MGA Demex has launched two parametric snow insurance products in the US. Cost Control Insurance protects property owners, facility managers, and municipalities against excess snowfall. Revenue Protection Insurance triggers pay-outs to snow-dependent businesses such as snow removal contractors when snowfall is low. The policies are backed by capacity from insurer Markel.
UK • Travel
UK neobank Novus has partnered with insurtech Companjon to offer parametric flight delay cover to its customers. People who use a Novus debit card to pay for a flight can purchase the flight delay benefit. If the flight’s departure is delayed by 30 minutes, policyholders receive £10 GBP compensation, plus a further £0.50 GBP per minute up to 90 minutes of delay. Stonebridge International Insurance is providing capacity.
India • Agriculture • Blockchain
IBISA, which provides software for insurers to operate parametric microinsurance solutions for smallholder farmers, has raised an undisclosed amount of seed funding from Ankur Capital. IBISA plans to use the funds to extend its operations in India. In December 2021, IBISA raised a €1.5 million EUR seed round led by Insurtech Gateway.
Guatemala • Agriculture • Weather
The United Nations World Food Programme has published a report on its parametric microinsurance pilot for smallholder farmers in Guatemala. The programme insured 1,292 farmers from May 2021 and paid $100 USD each to a handful of policyholders affected by drought. 9,437 farmers are now insured in the programme’s second year.
Data and modelling company ImageCat has launched its Global Economic Disruption Index, a measurement of the economic impact of disasters, including economic restoration and critical infrastructure recovery time. ImageCat sees parametric insurance products as one of the applications for the index.
India • Agriculture • Weather
Indian agriculture technology company BharatRohan will provide parametric weather insurance to its rice farmer customers in Barabanki, India. The policy protects farmers against excess and lack of rainfall, temperature and humidity. It is delivered in partnership with broker GramCover and insurer ICICI Lombard.
Pacific • Cyclone
Tower Insurance, which underwrites personal and SME insurance in New Zealand and Pacific Island Countries, is designing a parametric product for individuals in Pacific Island Countries. CEO Blair Turnbull says the product is intended for “communities that can’t get access to full comprehensive cover” and cites cyclones as a possible type of event that could be covered.
Cyber • Business interruption • InsTech podcast
Parametrix, an MGA that covers cyber business interruption losses, has launched a new parametric insurance product for content delivery network (CDN) downtime. CDNs are networks of servers used by most websites to improve loading speed. Fastly, a CDN, experienced nearly an hour of downtime in June 2020 that left people unable to access websites such as Amazon, the New York Times and the UK Government website. We interviewed Parametrix Co-founder and CTO Neta Rozy for InsTech podcast episode 115.
US • Weather
The organisers of the Dick’s Sporting Goods Open golf tournament in New York, part of the PGA Tour Champions, purchased parametric rain insurance for the event. The executive director of Dick’s Sporting Goods Open described the process of buying a parametric policy as “simple and straight-forward”. The insurance policy was provided by Vortex Weather Insurance with capacity from insurer Mitsui Sumitomo.
US • Earthquake
Jumpstart Founder Kate Stillwell writes about the benefits of parametric insurance and her experience building a parametric start-up. She concludes that parametric products will succeed with consumers when successful pay-outs after a catastrophic event are seen to benefit hundreds or thousands of people, and parametric products are embedded into conventional insurance or mortgages.
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