Parametric property insurance is the cutting edge of the industry. Mike Batey, director at MB Executive Ltd, looks at how Lloyds Aura reinsurance is entering the space.
Aura, the Lloyds managing general agent (MGA) specializing in Caribbean property risks, recently announced the launch of a new parametric reinsurance product for the region. This highlights the increasing importance of this type of alternative risk management solution in the property market. The rise in availability and popularity of these parametric property insurance solutions only looks set to continue in the face of rapid climate change.
The Aura product provides reinsurance cover for hurricanes that intersect within a specified radius of the insured’s location (typically 40 miles) with pay-outs based on the grade of hurricane within that radius. Bespoke variations on the base parameters are also available.
Presumably, what Lloyds Aura (and others like them) are seeing is the advent of a perfect storm (pardon the pun). While the risk profile of property damage caused by natural events is becoming more volatile due to climate change, property and business owners are seeking more stability in their risk-management solutions. This is precisely the kind of quandary that parametric property insurance is designed to address.
According to the National Oceanic & Atmospheric Association (NOAA) in the US, the 2022 hurricane season is likely to be another damaging one, having predicted before the start of the season back in June that there was a 65% chance of an above-normal season, a 25% chance of a near-normal season and a 10% chance of a below-normal season.
At the same time, the NOAA predicted, with 70% confidence, that there would be 14 to 21 named storms (winds of 39 mph or higher), of which six to 10 could become hurricanes (winds of 74 mph or higher), including three to six major hurricanes (category 3, 4 or 5; with winds of 111 mph or higher). This would represent a seventh year of above-normal hurricane activity with a record-breaking year occurring as recently as 2020.
While it is a major part of catastrophe underwriting for property reinsurance, it’s not just Caribbean meteorological events that occupy the minds of insurers, reinsurers, and MGAs, like Lloyds Aura. For example, the Australian bushfire season of 2020 is estimated to have caused damage in the region of USD 70 billion according to the World Meteorological Association.
In this arena, AXA has been applying parametric property insurance solutions to the innovative management of risk, deploying sophisticated satellite technology and data analytics. This is not only to predict the severity of damage to grain stocks, but also to measure the actual loss more accurately and grading that damage to apply to a parametric, index-based solution.
Parametric property insurance options such as these represent as close to a ‘win-win’ for both the insurance industry and its customers. For the insurers and underwriters, fixed liability for claims translates into a significant benefit for the insurer’s balance sheet compared with those risks that are, by nature, unpredictable and which only look destined to become more volatile as the pace of climate change continues to gather.
The pre-determined pay-outs also drive a much more cost-effective claims handling process which is a bonus for both the payee of those claims and the receiver of paid-out funds. This is particularly relevant in the MGA market which often represents an extra layer of cost in the value chain compared with some of the more traditional reinsurance, underwriting, claims management, and distribution models.
Specifically, in relation to the insureds, rapid recovery with a simple and quick pay-out process helps to provide liquidity when it’s needed most, immediately post-catastrophe. A fixed-pay-out may also provide welcome relief against losses, which may otherwise have been uninsurable in the commercial market.
Perhaps the biggest benefit of all in parametric property insurance, however, is the step towards restoration of trust in the insurance buyer/seller relationship. There is a raft of surveyed and anecdotal commentary suggesting that confidence in insurers, within both the personal and commercial consumer base, is at a worrying low point, particularly in property and casualty lines.
However, parametric options offer an opportunity to redress the balance. Principally, this is because the index-based nature of claims determination, more often than not, relies on independent, third-party measurements to determine the validity of a claim based on a simple, verifiable, and unambiguous process. This simplicity leads to a speedy and lower-cost resolution at a stressful time for the insured. Nothing engenders trust quite like reliability.
While parametric property insurance products are simple to understand for the end user, they are highly complex under the hood. Successful businesses in this space have embraced new technologies that are transforming insurance business models, products, and processes.
Access to granular, reliable, and real-time data from various trusted sources is the most powerful driving force in the parametric revolution. Connectivity with, for example, geolocation technologies, drones, and satellites can drive massive change in the range of data available, while data analytics and artificial intelligence (AI) models contribute to a new generation of measurable and objective digital parametric triggers for product innovation.
Progressive moves into parametric property insurance solutions, such as that taken by Lloyds Aura in the Caribbean property market, must surely be welcomed for the raft of benefits they deliver across the insurance and reinsurance value and distribution chain. This is especially true for risks susceptible to the environmental impact of climate change and the market volatility that comes with that.
To grow successfully in the parametric property insurance space, however, product providers, underwriters and claims handlers need access to best-in-breed digital tools to power the data mining and analysis required. That’s why FintechOS have taken an evolutive approach to data management.
To find out more about how the FintechOS platform empowers data managers, book a demo.
