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The InsTech perspective… parametric insurance for weather variability
Parametric risk transfer in its current form can be traced back to two financial instruments developed in the 1990s: catastrophe bonds and weather derivatives. Catastrophe bonds were created to cover losses from low-frequency, high-severity events such as hurricanes; weather derivatives were designed to hedge against the effects of variable temperatures, rainfall or other weather conditions on their revenues. Both are forms of parametric risk transfer but not regulated insurance products.
In recent years, more organisations have started to use parametric risk transfer to cover weather variability. Originally, weather derivatives were mostly used by energy companies to hedge against temperature risks. For example, in a warm winter, consumers use less energy, reducing revenue for energy companies. Now the growth of the renewable energy sector has led to new parametric products for different weather risks, such as policies insuring wind farms against lack of wind, or solar farms against lack of solar radiation. Swiss Re announces a new parametric policy for solar farms in this week’s issue.
Event organisers are using parametric insurance to cover lost revenue in poor weather, with one New York golf tournament receiving a pay-out after rain earlier this year. Revenues in the agriculture sector are also affected by rainfall, heat, temperature and other weather conditions. Many farms have purchased parametric policies to cover these risks, while international development organisations have frequently subsidised parametric insurance for smallholder farmers, whose livelihoods and food security are most affected by variable weather. In this issue, 14,000 farmers in Colombia are being protected against heat and excess rainfall.
Non-catastrophic weather events are also affecting insurance companies. Small losses from weather events are piling up across some insurers’ portfolios, even sometimes putting their credit rating at risk. The Demex Grouprecently described a case studyof an insurer in the Midwest US experiencing this; Demex structured a parametric reinsurance policy to cover the losses.
Arbol, which has built its business on covering low-severity, high-frequency weather losses with derivatives and parametric insurance, has now transferred more than $1 billion USD in notional risk, illustrating the growth in the parametric weather market. As previously uncommon weather conditions become more frequent, driven by climate change, more organisations may look to parametric risk transfer to manage the impact of weather on their revenues.
In the news…
Arbol transfers more than $1bn in risk since 2020
Climate • Weather
Arbol has announced that since the company started offering parametric insurance and derivatives in 2020, it has transacted more than $1 billion USD in notional risk. Notional risk refers to the total limits of all the policies sold through its platform. Arbol specialises in covering climate and weather risks.
Swiss Re backs new parametric solar energy cover in Malaysia
Malaysia • Energy
Insurer Etiqa, supported by Swiss Re, has launched Solar Energy Shortfall Insurance (SESI) in Malaysia. This parametric insurance product offers protection based on an index for sunlight shortfalls, ensuring solar plant investors have more predictable returns. The coverage compensates solar farm operators when actual electricity output falls below a set threshold due to inadequate sunlight, excluding factors like machinery breakdowns.
OTT: short-term rental hosts leave platform after revenue drops
Business interruption
MGA OTT Risk’s latest blog post analyses how hosts in the short-term rental industry have experienced variable losses in revenue. Certain properties have witnessed a revenue drop of over 50%, affecting hosts’ ability to cover mortgage payments and other costs. This causes some hosts to leave short-term rental platforms. To help support those experiencing revenue drops, OTT Risk is offering parametric income protection for the users of sharing economy platforms such as short-term rental hosts.
$50m cat bond uses county-level industry loss index from Verisk
US • Hurricane •Catastrophe bond
MGA SageSure has purchased a fifth catastrophe bond for its captive reinsurer Anchor Re. Whilst its other catastrophe bonds have used indemnity-based triggers, its newest bond, covering US hurricane risk, uses a county-level industry loss index. If the insurance industry loss from a hurricane, weighted by county, is greater than a certain threshold, a payout is triggered. Verisk Property Claim Services will provide the industry loss data.
Golf tournament receives pay-out for lost revenue after rain
US • Weather •Event
The DICK’S Sporting Goods Open, a golf tournament held in New York in June, has received a parametric pay-out from Vortex Insurance Agency, a subsidiary of MSI GuaranteedWeather (owned by insurer Mitsui Sumitomo). It rained for two days of the event, triggering a pay-out to compensate for lost revenue. This is the second year parametric weather insurance has been purchased for the tournament.
Texas hospital buys $30m parametric wind cover
US • Hurricane
Citizens Medical Center, a hospital in Texas, has purchased $30 million USD of parametric hurricane insurance for the first time, alongside $5 million USD of traditional wind coverage, at its commercial property insurance renewal. The hospital suffered physical damage and power outages from Hurricane Harvey in 2017. It was paid a claim of $5.9 million USD under its traditional insurance policy, but only after resolving a dispute with its insurer. If a hurricane of the same category and track occurred now, the hospital would be paid $6.2 million USD under its parametric policy.
Insurer launches parametric cover for households in Mexico
Mexico • Hurricane
Insurer GNP Seguros is offering GNP Riesgos Naturales Huracán, a new parametric insurance product covering households and small businesses in Mexico against hurricane risks. Limits of between $10,000 MXN ($600 USD) and $50,000 MXN ($3,000 USD) are available. Pay-outs are triggered based on wind speed information from the US National Hurricane Center.
14,000 farmers receive fully subsidised weather insurance
Colombia • Agriculture •Weather
Bank Davivienda will subsidise 17% and rural development bank Finagro the other 83% of the premiums for 14,000 smallholder farmers in Colombia to be insured. The parametric policies cover excess rainfall and heat, measured by satellite data. Insurer Seguros Bolívar is underwriting the policies.
Broker BGC Group starts trading weather derivatives
Weather
BGC Group, a financial services company specialised in broking foreign exchange, derivatives, commodities and other assets, has hired two weather trading experts to enter the weather derivatives market for the first time. Weather derivatives are tradeable financial contracts that are used to hedge against weather risks. They are a form of parametric risk transfer, but unlike parametric insurance, weather derivatives are not regulated insurance products.
Find out what you’ve missed…
Issue 53 – Parametric insurance enabling crucial financing
Issue 52 – Modelled hazard data for parametric triggers
Issue 51 – Parametric risk transfer enabling loss prevention
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As a seasoned expert in the field of parametric insurance and risk transfer, my extensive knowledge spans the historical development of financial instruments such as catastrophe bonds and weather derivatives, which are foundational to parametric risk transfer. I am well-versed in the evolution of these instruments since the 1990s and their transformation into crucial tools for managing various forms of risk, particularly related to weather variability.
The article you provided delves into the realm of parametric insurance, emphasizing its application in weather variability. Let me break down the key concepts covered in the text:
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Parametric Risk Transfer and Origins:
- Parametric risk transfer involves financial instruments designed to transfer risk based on predefined parameters.
- The origins of parametric risk transfer can be traced back to two key instruments developed in the 1990s: catastrophe bonds and weather derivatives.
- Catastrophe bonds were created to cover losses from low-frequency, high-severity events like hurricanes, while weather derivatives were developed to hedge against the effects of variable temperatures, rainfall, or other weather conditions on revenues.
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Expansion of Parametric Insurance:
- Initially, weather derivatives were predominantly used by energy companies to hedge against temperature risks affecting energy consumption.
- The growth of the renewable energy sector has led to the development of new parametric products, covering weather risks specific to wind farms or solar farms.
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Diverse Applications:
- Parametric insurance is now being utilized in various sectors, including event organizers using it to cover lost revenue due to poor weather conditions, and agriculture, where farmers purchase policies to mitigate risks associated with rainfall, heat, and temperature variations.
- International development organizations often subsidize parametric insurance for smallholder farmers, safeguarding their livelihoods and food security.
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Impact on Insurance Companies:
- Non-catastrophic weather events are impacting insurance companies, with small losses accumulating across portfolios and sometimes affecting credit ratings.
- Some insurers are using parametric reinsurance policies to cover losses from weather events and prevent credit rating risks.
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Companies and Developments in Parametric Insurance:
- Companies like Arbol, specializing in low-severity, high-frequency weather losses, have demonstrated significant growth in the parametric weather market, having transferred over $1 billion USD in notional risk since 2020.
- Swiss Re-backed parametric insurance products, such as the Solar Energy Shortfall Insurance in Malaysia, highlight the expansion of parametric coverage into new sectors.
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Examples of Parametric Payouts:
- The article mentions instances of parametric payouts, including a golf tournament in New York receiving compensation for lost revenue due to rain, and a Texas hospital securing parametric hurricane insurance alongside traditional coverage.
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Global Expansion of Parametric Insurance:
- The global reach of parametric insurance is evident in examples like a Mexican insurer offering parametric hurricane insurance for households and small businesses, and a Colombian initiative subsidizing weather insurance for 14,000 smallholder farmers.
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Emerging Trends:
- The article highlights emerging trends, such as short-term rental hosts leaving platforms due to revenue drops and the introduction of parametric income protection by OTT Risk to support users of sharing economy platforms.
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Financial Market Entry:
- Financial services company BGC Group entering the weather derivatives market underscores the growing significance of parametric instruments beyond traditional insurance products.
In conclusion, the article provides a comprehensive overview of the current landscape of parametric insurance, showcasing its diverse applications, global impact, and evolving trends. The examples presented illustrate the effectiveness of parametric risk transfer in managing the impact of weather on various industries and sectors.
