How parametric insurance is helping Australian businesses combat climate change risk

Advancements in data collection and analytics have enabled a greater understanding of exposure to risk. Parametric insurance is informed by data that establishes loss from the occurrence of events.

Instead of indemnifying an actual loss incurred, parametric insurance is an agreement to make a specific payment upon the occurrence of a pre-defined event or trigger. The triggering event must be objectively measurable, for example the occurrence of a category 5 earthquake within a defined geographical area. See our previous article on parametric insurance for further product details.

Recent interest in parametric insurance may be linked to the emergence of climate change as a key issue impacting businesses around the world. The unpredictable nature and increased incidence of natural disaster has been identified in findings by Swiss Re Institute which names climate change as the largest long term threat to the global economy (see our article here for further information).

In the wake of COVID-19 and a worldwide string of natural disaster events, businesses have become acutely aware of their vulnerabilities when disaster strikes. The US based Federal Emergency Management Agency (FEMA) states 90% of smaller companies fail within one year unless they are able to resume operations within 5 days.

Here parametric insurance become particularly effective: the intricate loss-adjustment process which delays many traditional claims leaving businesses without income or access to emergency funds is not required under parametric contracts. By contrast, parametric products intend on providing swift payments based on objectively measurable triggers so businesses can get up and running after a catastrophe much faster.

Parametric insurance genesis’ has been for weather related risk in developing countries. Its application is now broader and it is an option available for a raft of uninsured or uninsurable exposures. This extends to pandemic and health related risk as well as cyber risk. As regards the latter, parametric insurance could offset loss following a ransomware attack to fill gaps in a cyber liability policy.

Appetite to offer parametric insurance in the Australian market broadens. A notable recent entrant is Descartes who intends on covering loss from frost to Australian farmers. The product by Descartes was first developed for French wine growers faced with increased losses related to frost and wild fires linked to climate change. For Australian grain growers, spring frost is responsible for an estimated $360M in losses each year. Parametric frost insurance allows farmers to mitigate weather risk where coverage offered under traditional material damage policies continues to wane as losses rise.

With recent flooding in northern NSW, many insurers have refused or significantly increased the cost of flood cover. Single peril parametric cover (for flood) can complement the traditional material damage policy to protect property owners and occupiers that cannot attain or have limited flood cover.

Construction projects have also benefited from the use of parametric weather products. We consider in light of the recent losses that contract works material damage policies will also have flood exclusions and or sub-limits applied. Further, parametric products may be used to ascertain expected losses due to rain fall, wind or heat. These can be insured to alleviate project delay costs due to unforeseen or extreme weather events.

Bellrock has worked with clients across various industries with differing risk profiles applying parametric options to assist with their risk transfer strategy. Mostly the options presented incorporate a hybrid of traditional and parametric products. In assessing same, a detailed analysis of risk exposure and comprehensive information is required to understand coverage adequacy balanced with competitive costing.

Should you require some initial advice as to whether your business could benefit from this approach, please contact us via the form below.