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Feb 2023

Insurance capacity swirling in the eye of the storm

Source: Asia Insurance Review | Nov 2022

Robert DrysdaleBen QinHome to almost one-third of the world’s annual tropical cyclones, Asia Pacific represents one of the most active windstorm regions in the world. As climate change fuels Nat CAT volatility, the rising sum of insured losses due to cyclones is putting increased pressure on the prices and capacities available for corporate insurance programmes. The physical and financial implications of climate change and continued market hardening, as well as the subsequent supply chain implications from both have more risk managers turning to alternative risk transfer solutions, including parametric insurance, to mitigate exposure and self-insured retentions. Descartes Underwriting’s Messrs Robert Drysdale and Ben Qin explain why.
 
 
Conditions today are much stronger than they were 20 years ago. We see this in recent events such as typhoon Muifa, the first storm in history to reach all the way to Shanghai, causing significant business interruption as ports and shipping activities shut down while 1.6m were forced to evacuate. Or typhoon Noru, whose explosive intensification made it a historical outlier, as did its geographical path. Noru hit the Philippines northern islands, which typically experience significantly less windstorm events than the southern part of the country, leaving an estimated cost to rebuild in the worst affected areas as $5.07bn.
 
Last year, typhoon Rai caused 410 fatalities and approximately $900m in losses as it passed through the Philippines. Meanwhile in 2020, typhoon Goni (Rolly) stormed through the Philippines, Vietnam and Cambodia, leaving an estimated $234m in losses. In north Asia, typhoon Hagibis hit Japan in 2019, resulting in $15bn in losses, the costliest in recent memory before hurricane Ian struck the US and the Caribbean this fall.
 
Next gen solutions against storm damage and NDBI
As year-over-year losses mount, typhoon exposure is becoming increasingly challenging to insure, and to recover from. Material impacts - including wind or water damage, wave shocks and destruction of high-value/high-vulnerability assets such as outdoor fittings, prove costly both in terms of repairs and renewals, as recent losses tend to lead to premium hikes. In addition, typhoons often leave lasting direct and indirect impacts on immaterial assets and balance sheets. These include loss of revenue, loss of attraction, denial of access or facilities interruption, emergency response or relocation costs, and an increase in the cost of labour and raw materials.
 
As a result, the Nat CAT protection gap is widening, leading more companies to seek creative and credible solutions to avoid fully self-retained risk.
 
Parametric insurance offers fresh capacity as an alternative risk transfer option as brokers, companies, and public entities look to fill the gap left in their traditional programme and mitigate against evolving windstorm exposures.
 
How? Data revolution in an uncertain climate
Parametric covers leverage near-real-time data on a typhoon’s track and wind-speed, using modelling techniques and data sources that result in better risk assessment and overall insurance product design. The diffusion of technology throughout a parametric product not only more accurately captures a client’s exposure to future storms, but it also enables near real-time monitoring of specific events. Coming from trusted third-party providers, such as the Japan Meteorological Agency or NOAA, brokers and clients have unfiltered access to the parameters set in the parametric structure and certainty of what they will receive in light of a triggering typhoon event.
 
Through extensive use of data for pricing, parametric insurance radically simplifies the underwriting process, eliminating embedded costs and reducing the amount of time required to quote and bind a policy. Claims settlement is agreed in advance which allows for rapid disbursement of cash to businesses and communities facing insolvency in the wake of extreme weather events. This immediate infusion of capital helps prevent lasting economic impacts.
 
Case study – CAT-in-a-circle structure: Filling gaps in a hospitality client’s traditional programme
Alternative risk transfer insurance products leverage these data to structure ‘CAT-in-a-circle’ covers that provide a simple and transparent solution against typhoon risk. When a CAT-in-a-circle policy is deployed, pay-outs are triggered when the typhoon of a given strength passes within a predefined distance from the insured location(s).
 
CAT-in-a-circle structure
 
Problem: A large hospitality group went to the market on its typhoon programme for a series of properties located in the Philippines. It was looking for an insurance structure with varying pay-out levels, yet scrambling for coverage, as its traditional carrier severely lowered its sub-limits for typhoons, while increasing rates following typhoon Chanthu. The capacity market for windstorms also underwent a severe crunch.
 
Solution: Despite the market circumstances that often arise in the wake of catastrophic events, the robustness of parametric models ensures a consistent and reliable policy structure for brokers and clients. The parametric approach enabled the closing of the deal with favourable terms for all parties. Given the straightforward simplicity of the cover, the policy was appropriately priced to match the client’s budget and ensure a full-limit cover.
 
Case study - Wind-at-location structure: Covering a food and beverage company’s multi-site typhoon exposure
Wind footprint maps provide ‘wind at location’ data allowing for the event’s intensity to be assessed at the insured location(s). Such datasets improve typhoon wind field and terrain interaction models which further contributes to better data and, ultimately, better parametric product design. Wind at location data also enables expansion of parametric insurance policies into regions and geographies where data limitations impeded previous coverage.
 
Wind-at-location structure
 
Problem: A large food and beverage client managed multiple facilities across Asia, including several high-value sites in more remote locations. The client’s concern was that their small claims could not be paid due to a large deductible in a global programme.
 
Solution: A parametric typhoon cover for deductible-buydown and the destruction of assets was able to meet the client’s specific needs. The wind-at-location based cover utilised wind speed data on a high-resolution grid, allowing the client to have a much more precise estimate of damage costs. Moreover, the customised cover was designed to take into account the structural resistance to wind present at each site and adapt the pay-out structure accordingly. The client was able to attain full coverage against its typhoon exposure, with full certainty of the swift pay-out it would receive if an event exceeded a certain wind threshold at identified insured locations. A 
 
How it works
Unlike traditional insurance, which relies on lengthy loss-adjustment procedures, parametric insurance pays out when a predefined event (i.e., typhoon, cyclone, earthquake etc.) occurs as measured by a specified parameter or index such as rainfall, wind-speed or peak ground acceleration. Driven by objective data and real-time monitoring from ground-based sensor technologies, radar, and satellite imagery, parametric insurance provides a means to guarantee liquidity via swift and direct pay-out 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 costs low while offering precise protection.

 

Mr Robert Drysdale is head of Southeast Asia and Mr Ben Qin is head of north Asia and Australia with Descartes Underwriting.
 

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