Descartes Underwriting, founded in 2018, has scaled quickly to provide parametric insurance against climate risks to corporate clients around the world.
Co-founder & Head of Underwriting Sébastien Piguet joins Matthew on Podcast 165 to discuss trends in parametric insurance and Descartes' experiences with its clients.
Talking points include:
- Why some corporates are replacing indemnity policies with parametric
- Educating brokers and risk managers about parametric
- Insuring solar and wind farms
- Data sources for natural perils
- The potential for parametric cyber insurance
Descartes Underwriting was featured in our report Parametric Insurance - 2021 outlook and the companies to watch, which is available to download for free to InsTech London members.
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- Explore the role parametric insurance can play in climate change mitigation
- Compare some of the data sources for parametric insurance
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Going global - delivering parametric insurance at scale - Episode 165 highlights
Matthew: Sébastien, what motivated you to start Descartes Underwriting?
Sébastien: I learnt about the insurance market while working at AXA. I launched Descartes Underwriting with Tanguy Touffut in 2018, to be more agile, launch new products quickly and use technology in an industry ready for disruption.
Matthew: What problem is Descartes Underwriting solving with parametric insurance?
Sébastien: When Descartes Underwriting was launched, it used parametric insurance to cover non-damage business interruption risks not covered by incumbent insurers.
Now the share of the insurance market covered by parametric insurance is growing. In the past parametric insurance was mostly used to complement traditional insurance, but now more companies are replacing indemnity insurance with parametric insurance policies.
Matthew: Why would large corporations replace indemnity insurance policies with parametric insurance policies?
Sébastien: The risk manager of LVMH (Louis Vuitton Moët Hennessy), Alain Lagesse, tells us he is more comfortable with parametric insurance because he considers that indemnity insurance has a higher basis risk. Basis risk is the risk in parametric insurance that the pay-out is lower than the loss incurred. This is in fact a risk in all insurance products as exclusions and legal language in traditional indemnity insurance contracts also create a kind of basis risk.
The LVMH risk manager found previous indemnity insurance contracts lacked clarity or the coverage was not broad enough, which can create a dispute between the insurer and the client. For example, many losses caused by the Fukushima earthquake and tsunami in 2011 were not covered.
Another client needed wildfire insurance for a forest. With indemnity insurance, it was difficult to define what an event was. The client suffered a total loss of $200 million from wildfires but received a small pay-out because the insurer considered the loss to be spread separately over 25 events which each had a deductible of $10 million.
Matthew: It can be challenging to convince brokers of the value of parametric insurance. What has been Descartes’ experience with brokers?
Sébastien: Our distribution strategy relies on partnering with brokers. Descartes works with hundreds of brokers. Some are local, and others are large global companies. Overall, our experience has been extremely positive, and we value these partnerships as we continue to build our broker network.
Matthew: How much do risk managers know about parametric insurance?
Sébastien: As parametric insurance comes of age, risk managers of very large companies are now becoming more familiar with parametric insurance. Many smaller companies are still unaware, and risk managers may not know the range of perils parametric insurance can now cover.
Matthew: As the COP26 UN climate change conference wraps up, what role will parametric insurance play in climate change risk mitigation?
Sébastien: Parametric insurance has an important role to play in mitigation and resilience-building measures as climate change affects weather risk. Events like COP26 also help us work with investors considering the ESG (environmental, social and governance) impact of their investments. For example, Descartes provides parametric insurance products for solar farms and wind farms which have proven challenging to insure in the traditional market in many cases due to lack of historical data.
In order to remain fit for purpose during a changing climate, risk mitigation strategies must include insurance covers that secure the profitability of a given project by protecting its future cash flows against climate and environmental risks and adapting to each project's unique demands. This is the differentiation that parametric insurance can provide.
Matthew: What data sources does Descartes use to trigger policies?
Sébastien: We use publicly available data from agencies such as the US National Hurricane Center, US Geological Survey, US National Oceanic and Atmospheric Administration or Japan Meteorological Agency. Descartes is also launching products with data providers such as reask to protect clients against high wind speed at their location. It is not a traditional ‘Cat in a circle’ policy where pay-out is triggered by an event within a given area. Instead, pay-outs are triggered by data modelled at a specific location.
Matthew: What data do Descartes use for flood coverage?
Sébastien: While we also use gauge data from national authorities to cover flood exposures, we have partnered with ICEYE on flood monitoring data. ICEYE has launched a fleet of nanosatellites to improve the detection of flood events. Instead of using a gauge that needs to be installed, Descartes can use ICEYE’s data to settle claims, which allows us to provide parametric flood cover worldwide.
Matthew: What about cyber coverage?
Sébastien: Cyber risk will continue to be a significant issue in the coming years. Descartes Underwriting is collecting data and investing research and development time and resources into how we can build parametric products against cyber exposure. We are still exploring the solutions and it is too early to announce the final products.
Matthew: How does Descartes Underwriting find the right data?
Sébastien: The number of data sources is booming. Our underwriting technology and scientific team are well equipped to harness emerging data sources from satellite imagery to IoT devices, as well as from radar and on-site stationary sensors. We have a rapidly evolving underwriting platform that allows us to ingest and compile data to price insurance contracts. More often than not, the primary issue of insurability is a lack of historical data. Access to event data is one issue, but modelling the loss is another.
Matthew: Tell us more about Descartes’ geographical expansion.
Sébastien: Descartes now has offices in Singapore, Sydney, Houston, New York and London with commercial teams to meet brokers face-to-face and explain how the technology and products work.
Currently, all our underwriters are based in Paris, with one exception. Underwriters will soon join the London team too.
Matthew: Why did Descartes Underwriting join InsTech London as a corporate member?
Sébastien: It was a no-brainer. London is the historical centre for insurance and the place to be for global businesses. We are delighted to be part of InsTech London’s community.