Parametric newsletter: Issue Five

Investors value confidence.?

Every risk matters when an organisation is putting significant funds on the line. Where key threats can be measured by an index or the occurrence of trigger events, risk transfer may be able to make an investment more appealing.?

When lender MUFG was arranging debt financing for a 14-turbine wind energy project in Maine, wind speed variability was an important risk. The project’s energy production, and therefore its ability to make repayments, relies on sufficient wind.?

Munich Re?and MGA kWh Analytics designed a parametric wind proxy hedge tied to the project’s capital structure, reducing the financial risks of lower wind speeds for lenders. The energy project’s developer was able to secure roughly 20 percent more debt capital, led by MUFG, than it could have done otherwise.???

A large French corporation recently made another type of investment, spending at least $120mn to sponsor the 2024 Paris Olympics. A major concern was pandemic risk, after Covid-19 resulted in the previous Tokyo games being held a year later without spectators – the first such disruption to the four-year Olympic cycle since the Second World War.?

The organisation’s captive management team worked with parametric specialist?Ryskex?to structure a pandemic risk transfer product. It would have paid out $120mn if the Olympics had been cancelled for two years following a WHO pandemic declaration, with partial payouts for shorter delays or significant restrictions.?

These are just the latest in a growing number of investments enabled, at least in part, by parametric risk transfer. Last year, a hydroelectric plant under construction in Nepal that needed earthquake coverage to secure necessary financing turned to a parametric solution designed by?Swiss Re Corporate Solutions?and Aon. A four-peril parametric policy placed by?WTW?helped Sri Lanka’s largest seafood company meet a condition to receive a $15mn loan to invest in farming facilities. In both cases, traditional insurance was insufficient or unavailable.?

Insurance is an important enabler for investment. For certain projects from renewable energy to commercial sponsorship, customised parametric structures can turn out to be the best (or only) way to provide the confidence organisations need to invest.?

Launches and product development?

Axa?has launched a parametric heatwave employee benefit for outdoor workers in Hong Kong.? If the temperature exceeds 36 degrees Celsius for three consecutive days, customers will be compensated with a cash payout or an “anti-heatwave kit” of equivalent value.?

Australia’s national science organisation?CSIRO?is designing a new yield index for wheat farmers, intended to support the development of parametric insurance products.?

The?World Bank?has provided a $125mn grant to fund the introduction of parametric drought insurance in Somalia. It aims to reach 180,000 pastoralists with the coverage by 2026.?

The World Bank is also seeking to attract $205mn in private capital for the first phase of a newly announced climate resilience program in eastern and southern Africa. The program, which will be managed by?African Risk Capacity?(ARC), will include contingent credit, reserves and parametric risk transfer.?

The?Indian state of Nagaland?has renewed its parametric rainfall insurance policy, with Munich Re and GIC Re replacing Swiss Re as the reinsurer. The InsuResilience Solutions Fund is providing premium support.?

The government of Niue has approached the?Pacific Catastrophe Risk Insurance Company?to discuss extending its parametric tropical cyclone coverage to the Beveridge coral reef.?

Payouts supporting resilience?

ARC?has paid $11.6mn in claims to the government of Malawi and the UN Refugee Agency (UNHCR) under their parametric drought insurance policies. The drought in southern Africa has already triggered claims for Zambia and Zimbabwe, with Mozambique also expected to receive a payout.?

The drought has also triggered payouts to 7,000 smallholder farmers in Mozambique covered by a parametric scheme supported by the?UN World Food Programme.?

Around 66 farmers in Jamaica are also set to receive payouts from a parametric product backed by?Munich Re?after the wind speed trigger was met by Hurricane Beryl. More claims could be triggered after rainfall calculations are complete.??

Insurers can play a critical role in climate resilience planning,?Guy Carpenter’s head of public sector risk solutions for IMEA Ruth Lux told?The Insurer TV, highlighting parametric programmes in Mexico, Argentina and Uzbekistan.?

Howden?has found that smallholder farmers protected by parametric insurance have produced more yield on average. Chair of climate risk and resilience Charlie Langdale explained that many farmers without insurance keep some seed back in case of disaster, while those with insurance tend to sow all their seed.?

New partnerships?

While several of the largest international brokers such as Guy Carpenter and Howden have invested in parametric capabilities in recent years, fewer smaller outfits have done so, especially in parts of the world where parametric risk transfer is less well known.??

So it is notable that Thailand’s?Chaz Insurance Brokers?has partnered with Kairos Risk Solutions to develop and market parametric products. Kairos is led by Jeffrey Khoo, formerly APAC vice chairman for Arbol.?

Travel insurance brand Heymondo has partnered with?Blink Parametric?to offer automated flight delay coverage, underwritten by Mapfre’s Mawdy, to its customers in Spain.?

Zurich-based alternative risk transfer MGU?SRS Altitude?has announced capacity partnerships with Beazley and Generali Global Corporate & Commercial (GC&C).?

People moves?

Generali GC&C?has also appointed a new global head of parametric products and solutions. Michele Pignoli was previously the group’s head of insurance capital solutions.

Ben Fox, former head of strategy and risk at Hiscox Re, has re-emerged as part of the founding management team for Bermuda-based ILS vehicle?Members Capital Management.?

ILS?

Independent ILS management firms?Twelve Capital and Securis?have announced their intention to merge. The combined business will manage $7.8bn in assets, making it one of the largest ILS firms globally.?

Aon Securities?CEO Paul Shultz told?The Insurer TV?that Aon expects “higher growth in parametric products and structures” as he discussed capital inflows into the ILS market.?

Market growth??

One of the beneficiaries of growth in the parametric and alternative risk transfer market is?Scor, which last week reported significant growth in its alternative solutions book at the June-July renewals.?

Why is the market for parametric insurance growing? There is “a perfect mix of ingredients”,?Aon’s global head of parametric Cole Mayer said on a recent live podcast hosted by?The Insurer.

About?Parametric Newsletter

The Insurer’s recently launched?Parametric Newsletter?is free-to-view and analyses the latest news and developments in parametric and alternative risk transfer every two weeks.?

This September, we'll be launching?Parametric Insurer,?which will become the ultimate publication for all things parametric insurance. If you'd like to know more about subscriptions or commercial partnerships, please contact?Andy Stone at [email protected].