Australia's unpredictable weather sparks greater interest in parametric insurance

Advice offered to brokers

Australia's unpredictable weather sparks greater interest in parametric insurance

Catastrophe & Flood

By Roxanne Libatique

Australia has been hit with more frequent and severe weather events over the years, and its unpredictable weather is pushing Australians to move from traditional to parametric insurance, according to Descartes Underwriting (Descartes).

Ben Qin, head of North Asia & Australia at Descartes, said climate change has created so much volatility that the Bureau of Meteorology's (BoM) forecasts and commercial catastrophe models have become less accurate.

“Having a category 5 cyclone, as Tropical Cyclone Ilsa was when it crossed the Western Australian coast on April 13, so late in the season demonstrates that Australia's weather patterns are now renowned for their unpredictability. Despite nearing the end of the traditional cyclone season, the ocean waters are still warm,” he said. “Cyclones and floods still occur in drier El Niño weather patterns. Dry forecasts do not necessarily mean the country will be up in flames either.”

Moving from traditional insurance to parametric insurance

Qin explained that volatility has left traditional insurers afraid to deploy capacity for weather-event perils – reducing their appetite or pushing them to leave some markets, resulting in more interest in parametric insurance.

“Models based on historical data are no longer reliable, and insurers and reinsurers are nervous,” he said. “Some asset owners have no options, apart from self-insurance, because they cannot get traditional coverage, especially for wet perils. Instead, they are turning to parametric insurers like Descartes.

“Parametric insurance is an option available for many businesses where traditional underwriters have reined in capacity and appetite because of a lack of data and modelling to accurately underwrite catastrophe risk.”

Qin further explained that buyers have become better educated and more sophisticated about taking out insurance.

“They're getting on the front foot and seeking out ways to optimise their premium spend,” he said. “Asset owners likely to be impacted by floods are becoming more aware of the need for mitigation measures and capital expenditure to protect their assets. They understand you need a mix of insurance, mitigation, and resilience.”

Advice for insurance brokers

Unlike traditional insurance, parametric provides pre-defined payouts based on events that trigger the policy, for example, specific rainfall or river level heights for flood cover.

Qin urges insurance brokers to be educate about parametric covers because clients ask questions.

“Parametric insurance is here to stay and forms part of the new normal. Brokers need to embrace it to best advise their clients,” he said.

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