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May 2021

Parametric insurance comes of age

Source: Asia Insurance Review | Apr 2021

Meg ChaperonTanguy TouffutThe evolving risk landscape in Asia, compounded by hardening market conditions and a widening Nat CAT protection gap, has motivated the growth of innovative risk transfer alternatives. Descartes Underwriting’s Mr Tanguy Touffut and Ms Meg Chaperon offer some insights.
 
 
Climate change, natural catastrophes and environmental stress from urban densification are all contributing to a new risk landscape in Asia Pacific. Taken together, they act as a ‘threat multiplier’ that increases the impacts of existing industry exposures.
 
In recent years, a diverse range of perils dominated losses across the region. The year 2020 saw comparatively less Pacific tropical cyclone activity than the climatological average, yet total economic loss from cyclones exceeded $26bn, according to top brokers’ recent climate and Nat CAT reports.
 
This was largely due to record-breaking super typhoons: Goni (Rolly) in the Philippines, with the strongest wind speed at landfall (195 mph/315 kph) ever recorded and Ampham, the strongest storm on record to form in the Bay of Bengal, impacting India, Bangladesh and Sri Lanka.
 
Notably, droughts in China and Vietnam at the start of the year were followed by extensive flooding throughout the region, impacting 19 countries with total losses exceeding $55bn. After two years as the lead bearer of Nat CAT loss in the region, Japan also sustained significant $8.5bn in economic damage due to flood, namely in the Kyushu Islands.
 
The country was hit with less typhoon-related loss than the devastating Jebi, Trami, Hagibis and Faxai of the 2018 and 2019 seasons, but sadly marked the 10-year anniversary of the Great East Japan earthquake and tsunami. Wildfires, extreme weather, including major hail events in Australia, all rounded out a recorded total $102bn in economic losses due from Nat CAT, down slightly from the total $107bn of 2019.
 
Earthquake in Indonesia
 
Hardening market accentuates protection gap challenges
With significant year-over-year recorded losses, the Nat CAT protection gap in APAC keeps widening with only 23% of losses insured in 2018, falling to 19% in 2019 and further to only 12% in 2020.
 
Hardening market conditions from 1 January 2021 renewals indicate that this gap is likely to continue to grow. The past two renewal seasons have seen the trend in increasing property prices continue, ranging from 5-15%, with magnified impacts on highly Nat CAT exposed assets. More recently brokers also report further restrictions by reinsurers on terms and conditions, especially policy extensions such as non-damage business interruption covers.
 
With continued hardening, pressure mounts on Nat CAT deductibles and availability of competitively priced capacity, while corporates are urged to contain their premium spend. The current trend is expected to continue for at least the next 12-18 months and reinforces the role of the broker in thorough programme engineering.
 
This market evolution around Nat CAT has dealt a particularly heavy blow to the hospitality industry, as well as other assets that face limited market capacity, e.g. overhead telecommunications overhead transmission and distribution (T&D) lines, transportation infrastructure and offshore property. 
 
Use of parametrics is increasingly common to cover Nat CAT
Thankfully, as budgets and market capacity tighten, the growth of innovative risk transfer alternatives - such as parametric insurance - are also picking up speed. Driven by the availability of high quality data and new technologies, these alternatives are quickly becoming mainstream and cost-effective solutions to keep corporate and public sector clients covered in all market conditions.
 
For example, when a client experiences rate hikes in their property programme, their broker can suggest carving out their Nat CAT risks to a parametric cover. Often we see that this increases traditional player’s risk appetite, thus easing negotiations and enabling placement of their remaining programme.
 
The parametric cover also allows brokers to preserve their clients’ Nat CAT limits at an affordable premium. It provides swift liquidity of predetermined amounts in the event of a triggering natural event - cyclone, earthquake, drought, heavy rainfall, extreme weather, etc. - introducing much needed transparency following the unsettling lessons in coverage exclusions that the market learnt with COVID-19.
 
APAC: Parametrics in action
Infrastructure – How to cover a highway in the most earthquake- and cyclone-exposed region of Southeast Asia
Pain point: The traditional product offering, with double digit rate increases, was prohibitively expensive and did not offer lender set limits. Additionally, the nature of the asset, including various structure categories (bridges, tunnels) made it difficult for the client and broker to find capacity. 
 
Solution: We designed a parametric combined earthquake and cyclone cover for the entirety of the highway that took into account the changing soil nature and civil infrastructure along the route, adjusting payout for earthquake or wind speed severity accordingly. Earthquake exposure is measured in near-real time using peak-ground-acceleration recordings while cyclone activity is monitored using official data from JTWC. The highway got covered to the full required limit with bespoke terms that satisfied both risk management and financial parties.
 
Manufacturer – Covering flood while accounting for flood barriers, a challenge addressed by parametric insurance
Pain point: An electronics manufacturer in Thailand with significant flood exposure and heavy losses from 2011, now has its premises protected by a dike fortified riverfront. The risk accumulation, loss history and changing landscape due to the installation of flood barriers, made it difficult to find capacity for high value assets.
 
Solution: A parametric flood cover was designed to take into account client installed flood barriers. Custom tailored to the client’s risk exposure, the structure swiftly pays out when river water levels overtop the dike at predefined thresholds, as measured by on-site IoT gauges. Descartes monitored their exposure in real-time, notifying the client and providing quick indemnification if the policy triggered.
 
Distributed assets – T&D lines in the eye of the cyclone
Pain point: By nature, overhead T&D networks have extensive exposure to cyclone risk, making them heavily impacted by premium rate hikes when market conditions harden. Their locational distribution also adds an additional challenge to traditional loss adjustment.
 
Solution: Our parametric models precisely mapped the grid and network of T&D lines, providing a granular assessment of their cyclone exposure. Hand-in-hand with the client’s in-house risk management, we designed payout structures for each wind speed based on the modelled impact to the network, flexibly matching the client’s budget and ensuring a full-limit cover. Remote, near real-time monitoring of wind data allowed for payment within just a few days following a triggering cyclone, without undergoing the hassle of loss-adjustment on these wide-spread assets. Carving-out these heavily exposed assets also facilitated the traditional placement of the rest of the client’s programme. A 
 
Mr Tanguy Touffut is CEO and Ms Meg Chaperon is senior product marketing officer with Descartes Underwriting.
 
How it works
 
Unlike traditional insurance, which relies on lengthy loss-adjustment procedures, parametric insurance pays out when a predefined event (i.e. flood, cyclone, earthquake, etc.) occurs as measured by a specified parameter or index. Driven by objective data and real-time monitoring from IoT, radar and satellite imagery, parametric insurance provides a means to guarantee liquidity via swift and direct payout, following a qualifying event. This new generation of products complements or replaces traditional insurance at a more affordable premium that fits within contracting budgets, not on-top. With no on-the-ground loss adjustment required, a parametric cover keeps cost low while offering precise protection.
 

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