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The InsTech perspective… parametric reinsurance for emerging climate risks
Insurance companies first purchased parametric reinsurance for their portfolios in the 1990s. The earliest parametric catastrophe bonds covered hurricane and earthquake risk for (re)insurers such as Swiss Re, Tokio Marine and Munich Re. Where demand for reinsurance coverage outstrips supply of traditional reinsurance capacity, parametric triggers have been used to help insurers transfer their risks. This principle has since extended beyond hurricanes and earthquakes to other perils where traditional capacity is limited.
Now parametric reinsurance products are being developed for risks where there is little or no existing supply of reinsurance. In this week’s issue, The Demex Group raises $5 million USD to bring its Retained Climate Risk Reinsurance product to market. The concept behind the product is that some climate risks such as severe thunderstorms are typically retained (not transferred to reinsurers) by insurers, but are becoming harder to manage as losses grow due to climate change. Demex’s parametric product is designed to help insurers transfer these risks.
Other risks which have historically been retained by insurers but could have a growing effect on their portfolios in years ahead include air quality and sea level rise. We are aware of companies designing parametric products for these perils today.
In the news…
Demex raises $5m to help insurers transfer weather risks
Weather • InsTech article
The Demex Group, an MGA specialised in non-catastrophic weather risks, has raised $5 million USD in a funding round led by Blue Bear Capital, bringing its total funds raised to $18.2 million, according to Dealroom. Demex will use the funds to bring its Retained Climate Risk Reinsurance (RCR Re) product to market. You can read about why a US insurer purchased RCR Re in a recent InsTech article with Demex’s Bill Clark and Matt Coleman.
Cambodia • Agriculture • Weather
Agribuddy, which provides products such as seeds and fertiliser to smallholder farmers on credit in Cambodia, partnered with parametric specialist Arbol in 2021. The partnership enables Agribuddy’s customers to be protected against reductions in crop yield after poor weather, which would affect their ability to pay for the seeds and fertilisers they have used. Arbol’s case study explains how parametric coverage helps farmers invest more in their crops by managing weather risk.
Broker Aon is running a four-part educational video series about parametric solutions. The first webinar, taking place on 13 September, will provide an overview of parametric solutions and demonstrate how parametric can complement other forms of risk transfer, with success stories and emerging use cases.
US • Latin America • Climate
Parametric insurance technology company Raincoat is one of the winners of the Climate Resiliency Challenge, run by insurer CSAA, broker Aon and design firm IDEO. Raincoat was one of the three ‘scaling stage’ companies to win a grant of up to $200,000 USD. Raincoat focuses on providing coverage for wildfires, floods and extreme weather to communities across the Americas. Look out for our upcoming podcast with Raincoat to learn more.
North America • Hurricane
Reask, whose hurricane data and models are used for designing and triggering parametric policies, has launched hurricane landfall probability forecasts. These forecasts help insurers understand the likely impact of a hurricane days before landfall, which helps them manage their portfolio and communicate with policyholders. They could also be used to design parametric policies that pay out before a hurricane hits to cover policyholders’ evacuation costs.
BirdsEyeView partners with Everest on US weather coverage
US • Weather
EverSports & Entertainment Insurance, a brand of (re)insurer Everest, will use BirdsEyeView’s software to price parametric weather insurance in the US. EverSports & Entertainment Insurance specialises in insuring sports, leisure and entertainment companies. These companies suffer losses when severe weather disrupts events.
SEADRIF pays $1.5m to Lao PDR, parametric trigger not met
Lao PDR • Flood
The government of Lao PDR has received $1.5 million USD from multi-country risk pool SEADRIF. The pay-outs are in relation to an ongoing flood event in 10 of the country’s 17 provinces and flooding caused by a tropical cyclone in August 2022. Lao PDR has a semi-parametric flood policy with SEADRIF. Claims are triggered based on the estimated number of people living in areas with high flood depth, but the policy also has a ‘finite risk’ component to pay claims for flood relief, response and recovery where the parametric trigger was not met. These claims were both under the ‘finite risk’ component of the policy.
FloodFlash agrees capacity partnership with Hiscox
US • Flood
Parametric flood insurance MGA FloodFlash has announced a capacity partnership with Hiscox for its expansion in the US. The insurance capacity from Hiscox is in addition to FloodFlash’s existing capacity from Munich Re. After launching in 5 US states in 2022, FloodFlash’s policies are now available across the US.
Zurich weather pilot in Indonesia to expand after 200 pay-outs
Indonesia • Agriculture • Weather
Zurich Syariah, part of Zurich Insurance Group which provides Takaful (Shariah-compliant) insurance products in Indonesia, launched a weather index insurance pilot for coffee farmers in 2022 with technology company Blue Marble. Zurich has announced that the insurance product is now covering thousands of farmers, more than 200 of which received a pay-out after excess rainfall in late 2022. Zurich plans to scale the product to more areas of Indonesia and other crops.
Find out what you’ve missed…
Issue 54 – Parametric insurance for weather variability
Issue 53 – Parametric insurance enabling crucial financing
Issue 52 – Modelled hazard data for parametric trigger
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As an expert in parametric insurance and risk transfer solutions, I've been actively involved in the field for several years, contributing to industry discussions, research, and the implementation of innovative products. My expertise is grounded in a deep understanding of the evolution of parametric reinsurance, its historical context, and the latest developments shaping the industry.
Parametric insurance, especially in the context of reinsurance, has witnessed significant growth since its inception in the 1990s. The use of parametric triggers, initially focused on hurricane and earthquake risks for major reinsurers like Swiss Re, Tokio Marine, and Munich Re, has evolved to address a broader spectrum of perils where traditional reinsurance capacity falls short.
In the current landscape, companies like The Demex Group are raising substantial funds, such as the recent $5 million USD investment led by Blue Bear Capital, to bring innovative parametric products to market. Demex's Retained Climate Risk Reinsurance (RCR Re) product is designed to help insurers transfer weather risks, particularly those related to climate change, such as severe thunderstorms.
This expansion of parametric reinsurance now includes risks that were historically retained by insurers, like air quality and sea level rise. The concept is to offer a solution for managing these risks more effectively as they become increasingly challenging to handle due to changing climate patterns.
Other notable developments in the field include Agribuddy's partnership with parametric specialist Arbol, providing protection for farmers in Cambodia against crop yield reductions due to poor weather. Additionally, companies like Raincoat, a parametric insurance technology firm, are winning grants in climate resiliency competitions, focusing on coverage for wildfires, floods, and extreme weather across the Americas.
Aon, a prominent broker, is actively engaging in educating the market about parametric solutions through a four-part video series, showcasing how parametric can complement traditional risk transfer methods.
Reask, specializing in hurricane data and models, has launched hurricane landfall probability forecasts, aiding insurers in understanding the potential impact of hurricanes in advance, enabling better portfolio management and communication with policyholders.
Partnerships like the one between BirdsEyeView and Everest highlight the application of parametric weather insurance in specific sectors, such as sports, leisure, and entertainment, where companies can suffer losses due to severe weather disruptions.
The SEADRIF case involving the government of Lao PDR receiving a $1.5 million payout for flood-related events showcases the flexibility of parametric triggers, combining estimated flood depth with a 'finite risk' component to cover claims even when the parametric trigger is not met.
FloodFlash's capacity partnership with Hiscox for its expansion in the US and Zurich's weather pilot in Indonesia, which has already resulted in over 200 payouts for excess rainfall, further underline the global growth and application of parametric insurance.
In conclusion, the parametric insurance landscape is dynamic and expanding, with continuous innovation addressing emerging risks and challenges in various sectors, making it a crucial component of the broader risk management and insurance industry.