24 October 2016Insurance

Re/insurers pile into parametric weather cover

Re/insurers are making more capacity available for parametric weather coverage, which is driving prices down, according to Kurt Cripps, managing director at Aon Benfield, who said that the broker has created a panel of more than 15 carriers.

“Capacity is increasing all the time. It’s frightening how much new capital is pouring into this segment. It’s happening almost overnight in a marketplace which is notoriously slow to change,” Cripps said.

“This year we have concluded more transactions than ever, we have more markets asking us for business and have more clients coming to us talking about weather risk management. Right now, capacity is well outstripping availability for cover,” he said.

Parametric weather insurance uses ‘big data’ to protect businesses from the impact from adverse weather. It can, for example, protect a bar chain from revenue shortfall in a rainy summer.

The insurance can include paying out a pre-defined amount for every day that daily rainfall is above a specified level. This type of coverage can also help reduce the risk exposure of insurers. A home insurer can, for example, buy reinsurance coverage against frost causing a spike in burst pipe claims. The carrier could receive a pre-defined amount for every day the daily minimum temperature is below a specified level.

“The beauty of the product is that it’s so tailorable,” Cripps said.

The increased availability of data thanks to technology has helped drive the growth of parametric weather products. “It’s only recently that our market has really got a handle on better understanding weather risk and giving our clients better advice,” he said.

Aon’s parametric weather cover is based on data from official weather stations and remote sensing to a 5km x 5km resolution. “Big data has a large role to play in this market as we utilise more gridded datasets,” Cripps said.

An attraction of this business for insurers is the fact that “it doesn’t correlate with any other line of business and it’s generally short tail in nature”, he noted.

“Advantages for businesses include the fact that claims get paid out promptly as the market is probably as transparent as it gets from an insurance perspective,” he added.

The segment is likely to continue growing as weather becomes more extreme due to climate change. “Global weather phenomena and adverse weather trends will be driving further demand in the future,” Cripps said.

Weather plays a critical role in 88 percent of businesses globally from a P&L (profit and loss) perspective and it can adversely impact a firm’s reputation and its financial performance, according to Aon.

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