Can parametric insurance combat climate risks?

The succession of floods across Australia have highlighted the inadequacies of traditional insurance. Sydney based Ben Qin is head of North Asia and Australia for Descartes Underwriting, a firm that specializes in parametric insurance. Qin told Insurance Business TV that parametric offerings can cover these gaps in the insurance market and help build resilience to natural catastrophes.

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Daniel: Hello and welcome back to Insurance Business TV. I'm Danny Wood, news editor of Insurance Business Australia. And today we're joined by Ben Qin, head of North Asia and Australia for Descartes underwriting. On its website, the firm headquartered in France says it was born out of the conviction that climate change calls for a revolutionary approach in insurance to better protect corporations and governments. We'll talk to Ben about climate change challenges and how parametric offerings can help deal with that. He's based in Sydney. Hi, Ben. How are you doing?

Ben: Hi, Danny. Good day. How you doing?

Daniel: Good to have you on the show. Ben, for those who don't know much about it, just in brief, how is parametric insurance different traditional insurance offerings? Exactly.

Ben: So the way that we think about parametric insurance is that it becomes a means to an end and is a means to an end in dealing with difficult to model perils as we see with climate change. So so the way that parametric contracts are defined, they are based on a predefined event outcome as opposed to traditional insurance, which is based on a post loss outcome, if you like. So you only you only contractually know what a loss settlement amount is under the traditional model. After the loss happens and after the loss, Justice and all the lawyers and everyone have gone have gone through the process, whereas a parametric contract is something where the event as well as the amount subject to that event has been predefined prior to the contract being set up.

Daniel: And how exactly do you see parametric insurance building resilience against all these climate risks that we're facing?

Ben: So what we see with the future of parametric insurance in this space is really about plugging in gaps where traditional insurance have either left capacity or challenges on the table for gaps in the market, for insureds to to resolve or insureds and brokers to resolve the fact that we are looking at a predefined event and a predefined amount according to those events. They are highly tailored and highly flexible to what the insureds want. So this is less about a broad brush in traditional insurance models and say if you're in the area of Cairns or Lismore or along the Brisbane River, everyone more or less insured is going to get charged this amount, whereas we are talking about specific premises, specific assets and what that particular risk profile and that risk appetite is for that insureds. And that creates a level of awareness and elevates them. I guess whoever owns the building, the asset owners, the lenders behind it, everyone needs to really, I guess, be encouraged to understand the risk profile behind it rather than I guess your your traditional thinking is blanket cover everything embedded and it's some of these things that are causing strife with insurers that given away almost like as a freebie. So obviously it's not a sustainable model as we're finding out over the years, all these unmodelled losses, secondary perils, if you like, whatever you want to call it, is actually creating a lot of losses in the market. And that's exactly what we're trying to prevent, minimize whatever you want to call it, but create a sustainable approach going forward by having a more fairer risk allocation between the insured and the insurer.

Daniel: So it's a more focused offering and more asset based than traditional insurance, as an example of that. Could you talk about this parametric frost offering that you launched in 2022 in Australia that was actually developed for French vineyards? Because as you'd expect with a name like Descartes, you're actually headquartered in Paris.

Ben: That had been in the market under a traditional package for crops, but it's never been looked at in isolation. And I think by the time all the losses came, whoever had capacity left, they were withdrawn. So we look at it based on individual farm and individual paddock level and given given the, I guess, temperature profile or wind profile and also the specific circumstances leading to frost. Each individual circumstances is very different as we finding out. So some people have installed, for example, frost fence on that side. So they've already sunk millions of dollars into their farms. And that's where we immediately take into account of risk mitigation and say, hey, these these guys, they've already done the hard yards, they've already put in mitigations in place, and therefore we offer immediate rate relief simply because the the cover you like for frost on low temperature doesn't need to go that low. So we can say well it's a again it's a great example of showing it's a mixture of resilience on the ground. The fact that someone's aware already of the risk profile and all they want to do is a more of a more of a catastrophic risk transfer. And that's when we can offer cover that's highly tailored to that particular risk, to that particular location. And according to to that, farmers or the growers appetite, I mean, it's a slow burn, especially in the agriculture sector. I think the the sector itself, it's heavily under-insured across many, many years. And just it's a simple function of the market capacity, supply and demand of over the years and the various distribution channels that have existed in the Aussie crop market. But I think the values are getting greater. The risk is getting bigger. I mean, if you take this year, for example, if you look at what's happening with costs of fertilizers, chemicals and what what each individual is putting into the ground as as part of the plantings, the values are actually doubled, right, in terms of input costs. So the risk is actually larger compared to previous years. And some people maybe cannot afford to self insure anymore. So that's where you really need an education and an awareness piece to say where exactly is your risk appetite? There must be a threshold in there to basically say, is it a is it a one in ten year tolerance? Is it a one in 50 years tolerance for volatile weather? Because that's that's effectively the gamble you take by not insuring. But it's really a way for someone for this for an educated risk owner to really say, hey, there is a threshold to to which I can withstand a catastrophic level of risk and I can clearly see a parametric contract can can delineate between what I can take as retention and what I can take as pure insurance on the on the at the event level.

Daniel: Stepping back with a bigger focus, are there challenges for parametric insurance offerings when you develop develop it in France and then have to adapt it to a different region like Australia? But what are the challenges there, if any.

Ben: The issues? I'm still going to be the same for a French based location as opposed to an Australian based location. I mean, I've been looking at this space for the last ten, ten years, specifically for Australia and for the wider Asia-Pac region. We have the luxury here of having the Bureau of Meteorology and that's where the primary source of the ground truth or the information is. And we, like I would say, some of our products, especially in the agriculture space, wouldn't exist if without the BOM and, and the BOM provides really good information, both from a historical point of view, and that's mostly most of the historic codes are used for, its for the purpose of underwriting for us to really understand the historical weather profile, but also between the insured and the insurer that they act as an independent third party. So not so. Neither the insured or the insurer can go ahead and manipulate the BOM weather data. And that's really important because it's just a simple insurance concept or moral hazard insurance one on one.

Daniel: You mentioned floods, but what parametric offerings are actually available on the Australian market now?

Ben: I mean, aside from agriculture, which is about a third of our book, but the majority of our book is, is in cyclones, bushfires and we're starting to see a lot of floods come out, unfolded from the traditional markets now simply because there's too many, too many events and they've been in a spotlight and I'm guessing reinsurance and treaties is it's going to cause a double whammy effect with insurers now. But yeah, in effect we we're starting to see why parametric insurance is becoming a good alternative for traditional covers where either becomes a capacity issue or a coverage issue for traditional contracts. But some of these perils are starting to get thrown out and starting to see a lot more scrutiny. And I mean, as we saw with the bushfire events in 2019 to a 20 season, there are a lot of losses that came out of that driven by bushfires and that's where we started. We started to pick up some of those fire risk. Similarly with hail risk as well, there's with crops and motor dealers is starting to see a lot of those exclusions being applied, either from a blanket exclusion from from that particular property contract or that crop contract as well as coverage concerns as well. So again, it's going to it's going to do this same kind of thing with floods. And I guess in the New Zealand market we earthquakes as well for specific accumulated regions as well.

Daniel: What kind of business actually protect itself against with parametric offerings in Australia at the moment. We've talked about frost, but there are obviously floods, cyclones, fires. I mean how active are parametric offerings in those areas in the Australia market at the moment and how do they deal with multiple threats? Can parametric offerings deal with a multiple threat?

Ben: Yes. I mean, in effect, we are still underwriting single named Perils. We can, of course, package it up. But generally speaking, we are looking to tackle challenges from the insurance market, and that is from the traditional insurers. On a name peril basis. So we're starting to say, well, if cyclone is of challenge for you because of your reinsurance aggregates, because of your overall aggregations in the region, we can take care of that for you. Right. And that and that goes the same with flood and that goes the same with hail and all the other perils I mentioned. Whether or not we're going to see more and more perils come up and being packaged as part of one insurance contract or one one policy. Yeah, it could. It could may well happen because especially after, I suppose, all these global catastrophe events, maybe some of these catastrophe aggregates from reinsurance treaties. They may quickly dwindle or disappear. We'll see that. Yeah, maybe as a result of the aftermath after the one the one one renewals for the reinsurance treaties.

Daniel: You mentioned BOM the Bureau of Meteorology. And I mean, to what extent can you base a parametric payout on a BOM weather forecast or what exactly are the mechanics behind a parametric payout?

Ben: The easiest and I guess also the easiest for the clients and the insurer to understand is to attach it to the nearest bond flood gauge. So most businesses along the river is exposed to riverine, flood or fluvial flood. Effectively sit along alongside the river. So most insureds that we talk to, they can see, they can see the gauge right there. And they've been installed by the BOM 30, 40 years ago. And they, they use the benchmark readings of of that particular gauge. It's especially important in the last two or three years when when there have been real, real events. So they can actually see actual benchmarks straight out of the gauge and what's happening at their own premises. So provides a good benchmark to basically say, hey, if you've got a gauge nearby and we know what that gauge does and what the loss could be at our site at different levels of what that gauge measures. And and then you have an education piece and then you have, you're creating also a need for some some level of cover because someone else had withdrawn flood cover. And that's, I guess, the appeal and the I think the anticipated growth for our flood product.

Daniel: Ben Qin, thanks very much for joining us on Insurance Business TV.

Ben: Thank you, Danny.

Daniel: And Ben Qin is head of North Asia and Australia for Descartes underwriting. He's based in Sydney. You've been watching insurance business TV. Bye for now.