June 2022


New dimension complements traditional cover

By Kate Tilley, Resolve Editor

Parametric insurance is emerging as a new dimension to underwrite risks that were previously uninsured or too costly for insurers to accurately price the risk.

Unlike traditional insurance, parametric insurance does not indemnify the pure loss, but pays a claim after a trigger event occurs.

The idea was mooted at the 2018 AILA National Conference in Perth, WA, by Swiss Re Claims Manager David North, who said: “Parametric insurance offers fast, transparent payouts after a loss event, based on a pre-defined trigger.”

He cited examples of flight delays, cyclone damage and windstorms affecting crops where parametric insurance has been successfully used.

A flight delay compensation policy can be triggered by just 30, 45 or 60-minute delays, responding with a $100 payment, usually within an hour. Traditional travel cover generally requires delays of more than six hours before it pays costs incurred.

Swiss Re Corporate Solutions developed a parametric policy, Storm, for island resorts, tourism operators, power distributors, and other entities impacted by cyclones or hurricanes that cause physical or economic loss.

Parametric insurance is also used in agriculture, with typical triggers being lack of rainfall over a specified time period or storms of pre-determined wind speeds.

Mr North said greater access to data had assisted underwriters to write parametric policies.

“Parametric insurance is complementary to, not a replacement for, traditional insurance, offering broader coverage options or protecting insureds’ large excesses. It’s based on a different actuarial model that can expand on traditional coverages,” he said.

Rethink flood

With the Qld and northern NSW flood insurance bill tipped by catastrophe loss data aggregator Perils AG to reach $4 billion, a new entrant to the Australian market has called for a rethink on flood cover.

Ben Qin, Head of North Asia & Australia with Descartes Underwriting, says parametric insurance is an option available to many properties where traditional underwriters have reined in capacity and appetite because of a lack of data and modelling to accurately underwrite the catastrophe risk.

“Descartes uses non-traditional underwriting methods with state-of-the-art technology, including machine learning, real-time monitoring from satellite imagery, data from Internet of Things (IoT) devices installed at insured properties, and publicly available data on natural catastrophes, to individually price risks anywhere in the world,” Mr Qin says.

The data shows the impact of natural catastrophes like the Queensland-NSW floods can be dramatically reduced by mitigation measures.

For example, in the latest floods, Brisbane and surrounding areas received 40% more rainfall than occurred in advance of the 1974 floods, before the Wivenhoe Dam was constructed. However, the flood peak was about 30% lower than pre-dam levels.

Mr Qin says describing floods as one-in-100-year or one-in-500-year events is misleading. “The frequency of events has shown those terms are not meaningful. A La Niña weather pattern will impact on the likelihood of floods and better preparation through mitigation is essential,” he says.

Data-rich analysis

“Descartes’ data scientists combine a variety of data sources to precisely assess and measure flood risk in near-real time at clients’ premises. The more data that is collected and analysed, the more accurate the probability statistics and the greater the ability to accurately price the risk.

“That enables the sustainability and longevity of insurance, and in turn increases the resilience of communities to natural disasters in catastrophe-prone areas,” Mr Qin says.

Descartes designs triggers, for example, specific rainfall levels or flood heights, in partnership with brokers and their clients, then tailors them to suit each insured location and existing flood prevention measures.

“The Queensland-NSW flood damage demonstrates that it’s time for brokers and their clients to rethink how they place catastrophe risks,” Mr Qin says.

“Three years ago, after the bushfires, the London market and reinsurers re-examined the risk and removed bushfire capacity in the Australian market. That’s where parametric insurance can fill the gap.

“The lack of sound data and risk modelling means insurers take a knee-jerk reaction and withdraw availability of cover after large events. The same could happen now in flood-prone regions of Queensland and NSW,” he says.

“The value perception of the risk on the ground is different from the coverage available in the market.

“However, with the right combination of data, modelling and product, we could easily differentiate between uncommon versus extremely rare events and set the parameters accordingly,” Mr Qin says.

Descartes writes parametric insurance for crop covers, natural catastrophes, non-damage business interruption, and renewable energy options globally.

Download Descartes flood insurance white paper here.

Cyclone, hail protection

Another new entry to the Australian market is Redicova, which provides a parametric wind insurance product for properties in northern Australian coastal areas and inland up to 300km, from Carnarvon, WA, postcode 6701 to Bundaberg, Qld, postcode 4670, including the Northern Territory.
Lloyd’s-backed Redicova provides an agreed lump sum payment that is triggered when the BoM declares a severe tropical cyclone (categories 3, 4 or 5) that passes over an insured’s address.

“We usually pay your sum insured within three business days of making a claim, regardless of any other insurance you have. This provides you with fast disaster recovery cash to help you when you need it most,” the Redicova website says.

Gold Coast-based underwriting agency Mainstay Underwriting has just introduced a parametic hail cover for motor dealerships.

A specialised IoT Hailios hail analysis device at an insured dealership records the size of hailstones during a hail event and, depending on the size of the hailstones, Mainstay will make a cash payment to the dealership. No loss assessment is required and no excess payable.

The minimum hailstone size is 3cm, attracting a 25% payout. Hailstones must be larger than 5cm to get a 100% payout.

Vulnerable communities

Insurtech Lemonade has launched a blockchain-based parametric cover to insure vulnerable communities against the impact of climate change.

The Artemis insurance news service says farmers can buy parametric climate or weather insurance, using their phones, in global stable coins or local currencies, and payments will be sent back to farmers via their mobiles.

Daniel Schreiber, Director at the Lemonade Foundation, told Artemis the foundation was established to build exponentially impactful technologies. “By using a decentralised autonomous organisation instead of a traditional [insurer], smart contracts instead of insurance policies, and oracles instead of claims professionals, we expect to harness the communal and decentralised aspects of web3 and real-time weather data to deliver affordable, instantaneous climate insurance to the people who need it most.”

The Lemonade website says the absence of data in emerging nations means weather forecasts are often inaccurate, and there are barely any early warning systems for cyclones, droughts, and intense floods.

That deters insurers and reinsurers from doing business there, making insurance either unavailable, or too expensive.

“The Lemonade Crypto Climate Coalition, funded by the Lemonade Foundation, was formed to tackle this problem by solving three main challenges: accurately quantifying weather risks; automating claim assessment; and providing adequate funding and reinsurance.”

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the New Zealand Insurance Law Association.