Parametric insurance is increasingly being used to complement traditional property insurance and help address climate-related gaps in coverage, according to Laurent Richème, Global Chief Underwriting Officer for Property at AXA XL and Gwendal Pougnet, Head of Parametric practice, in charge of Capacity development at AXA Climate.
Climate change was again ranked as the top risk in the AXA Future Risks Report. What doe this mean for your commercial risk clients?
Laurent: There is a clear trend for increasing losses from natural catastrophes. Last year was the sixth consecutive year in which global insured losses exceeded $100bn. And while tropical cyclones and earthquakes are still an important driver, we see that secondary perils – such as wildfires, severe thunder storms and flood – now account for a much larger share of insured losses. This is a significant shift from the past.
So I think it’s safe to say that the need for insurance protection will continue to grow in this area. Businesses are growing more aware of the impact natural catastrophes can have on their operations and increasingly on their supply chains. And they are looking to insurers for advice and insights, as well as risk transfer solutions. They want to understand how their locations and assets are exposed to natural catastrophes, not just today, but also how the nature of climate-risks will change in the future and how they can best adapt and protect themselves.
So where does parametric insurance come in?
Laurent: While demand for protection is growing, traditional property insurance will not able to match the exact needs of our clients every single time. For example, non-damage business interruption from events like heat-waves or droughts have been typically out of scope for traditional insurance, so parametric products are a great compliment there. Parametric solutions can also provide additional or specific capacity where the traditional market may by unable to do so, such as locations at high-risk of flooding.
Gwendal, could you explain how you deliver more joined-up solutions?
Our aim is to find one AXA solution for clients. The parametric underwriter coordinates with the property underwriter to find the best solution for the client. Concretely, when a coverage is restricted or excluded under a traditional policy, we can provide a parametric layer to cover this specific exposure, complimenting the traditional property insurance product. So two policies, but one solution.
Temperatures broke new records in Europe this summer. How can parametric insurance help mitigate such climate-extremes?
Gwendal: At AXA Climate, we have the technology and climate science expertise to model any number of potential triggers. Each climate index is designed to reflect the actual economic risk of our client as accurately as possible (damage, lower revenues, increased operating costs). For instance, the index could be the number of consecutive extreme heat days or periods of lower than expected rainfall. But there is no one-size-fits-all formula: each contract is tailor-made, based on the context of each client.
Do you have any examples of how this works in practice?
Gwendal: we recently work with a large German manufacturer whose logistics is based on river transportation on the Rhine. When the river is in extreme drought, the client has to switch from river to road transportation, which is basically four times more costly. Essentially, the longer low water levels persist, the larger the financial impact is for the company.
So, we sat down with Laurent and his team to provide the client with a non-damage parametric business interruption solution linked to the height of the Rhine. We were able to use existing gauges to monitor the water level at a specific location, build a model and correlate the water level with the financial losses for the company.
In addition to the traditional property policy, we provided a parametric layer with a pre-agreed daily payout triggered by the river height. This is a great example of how a parametric product can provide a versatile and innovative solution and fill protection gaps alongside traditional insurance.
Who is best placed to benefit from parametric insurance?
Gwendal: I would say everybody, but in practice today, it is mainly Corporate clients. Almost all sectors are sensitive to climate and weather anomalies. Beyond manufacturing, we see firms in, retail, hospitality, construction and transport using our parametric protections to address their climate gaps. For Agriculture clients, our parametric yield protections are based on drought, temperature (frost) or lack of rainfall. For Renewable Energy clients, our parametric business interruption protections are based on lack of wind, sun, rainfall leading to reduced electricity production and or shortages.
Laurent, is loss prevention also becoming more relevant for traditional property insurance?
When we engage with clients we also provide risk consulting and loss prevention services in parallel to the insurance offering. The day we start to insure a company our services kick-in. Our engineers will carry out a desktop review to analyse their exposures and identify any weak spots. If required, we can then trigger an onsite survey, where our specialist engineers carry out a granular review of the status of a location and come with a set of recommendations to improve the risk and prevent the impact of future climate events on the location.
This approach is well established for fire and machinery breakdown, but in recent years we have been building our risk engineering expertise and tools for natural catastrophes. At a more advanced level, we can even extend our risk analysis to a client’s critical suppliers and their locations.
What is the future role for parametric insurance?
Gwendal: the adoption of parametric insurance will accelerate for sure. Parametric insurance will become increasingly relevant for clients to match their increasing protection gaps. Relying on our Science and climate data expertise, we can build relevant protections in each context. We are already using artificial intelligence in our models, to learn, to anticipate and predict. And we will continue to strengthen its use as well as to strengthen our Science and climate expertise to the benefit of our clients.
A last word from you Laurent?
The needs of our client regarding insurance against natural catastrophe perils will only continue to grow in the future. And we strongly believe that the combination of traditional insurance and parametric is the answer to providing solutions that are fully adapted to their needs. If we stick with traditional products alone, there will be gaps. But the combination of the two is a powerful solution.
I would also add, that before thinking about insurance solutions – be that traditional or parametric – the first point of call should always be prevention. Anything that clients can do to improve the resilience of their activities is a plus.
