Parametric possibilities

Parametric possibilities

Parametric possibilitiesCould cover based around agreed sums and risk levels be a simpler option for catastrophe-prone northern Australia, and beyond?

By John Deex

Protecting assets: Mirage Country Club Port Douglas arranged parametric cyclone cover through Epsilon P arametric insurance has been around for decades, but it’s still a new concept to many customers in Australia. Yet it could be an attractive alternative in under-pressure geographical regions.

So what is parametric insurance? It’s startlingly simple – paying out an agreed sum in the event of a specific and measurable weather trigger.

It means cover can be carefully tailored to match an insured’s risk appetite, exclusions are less of a concern and claims can be paid out quickly and efficiently as there’s no need for a detailed assessment of the loss.

Protecting assets: Mirage Country Club Port Douglas arranged parametric cyclone cover through Epsilon

Australian underwriting agency Epsilon – part of the UK-based Ardonagh empire – has started offering Lloyd’s underwritten parametric cover to north Queensland businesses, and there has been significant interest.

Epsilon believes this is just the beginning, with parametric cover particularly suited to Australia’s weather extremes and applicable to a wide variety of industries across the country.

Chief Underwriting Officer Paul O’Leary tells Insurance News the spark for the offering was the increasing insurance challenges faced by north Queensland strata properties due to tropical cyclone exposure.

“They were having to revert to going into the London open market to find solutions,” he says.

“As anyone knows, as soon as business is shown in the London open market it is immediately considered distressed business. And being distressed business, it gets treated that way – the premiums are significantly high and the deductibles are very high.

“It’s not the best solution.”

The catalyst for Epsilon to look more deeply into the parametric option came when a broker told the agency that traditional markets moving away from north Queensland business had “created a void”, and it had been able to engage MeteoProtect, a division of European brokerage Cooper Gay, which is now also owned by Ardonagh. Paris-based company MeteoProtect specialises in parametric cover and had previously enquired about opportunities in Australia.

“When this broker approached us it gave us a great opportunity to test how that would work,” Mr O’Leary says. “Our first foray was into parametric insurance around tropical cyclone and for strata-style businesses.

“We’ve now written several of these and we’re almost getting daily inquiries, and it’s expanded beyond strata business to clubs, hotels and pubs and the like.”

Mr O’Leary accepts that parametric cover isn’t a silver bullet to solve the region’s affordability issues.

While it’s not cheap insurance, it is generally cheaper than traditional options and provides much more flexibility.

"If we were able to take catastrophe right out of the property picture, you'd get a lot more consistency in pricing." - Paul O'Leary, Epsilon

“It allows clients to decide where they feel their risk exposures are and manage those risk exposures, and transfer the ones that they’re uncomfortable with at a price, but retain the risks that they feel comfortable with.”

A traditional policy might cover all cyclones, but have a relatively high excess, Mr O’Leary says.

The alternative is for a client to accept the risk of lower category cyclones but insure category 3, 4 and 5 events through a parametric policy.

This would enable them to take out a traditional property policy without the cyclone component, reducing the cost. The parametric policy also has no excess.

“The loss is triggered by an independent body, such as the Bureau of Meteorology, which tracks these cyclones,” Mr O’Leary says.

“And if it falls within the radius of the nominated property, then the policy triggers. There does have to be a loss, but it could be a consequential loss without damage to the property.

“And the policy will pay out quite quickly – usually within 14 days of being notified.

“The insured can use those funds to rectify the property or use it for expediting expenses – temporary accommodation, all these types of things – at a time when they really need it quickly. They can utilise those funds straight away.

“And then, it’s not until 210 days after the event that they then need to come back and justify what they’ve spent the money on.

“If they’ve met all the requirements, then that’s good. If they’ve spent more than they were initially paid, then the policy will pay further up to the limit. But if they haven’t spent all the funds, and they can’t spend all the funds on the property, or the damage, or the loss, then they would need to refund any unused payout.”

Parametric payments are always in cash – there’s no need for an insurer-sanctioned and insurer-managed rebuild, making the whole recovery process potentially simpler.

“I haven’t yet seen a claim in action,” Mr O’Leary says. “But I think it would make it a lot easier for the insured to negotiate with trades if they’ve got cash to pay and the trades aren’t having to wait on insurers to say what’s covered and what’s not covered.

“So I think it would put the insured in a much stronger position to get work done. It stands to reason that that would be a strong bargaining point for the insured.”

After initially working with one Cairns-based broker, Epsilon now wants to expand the offering across the broker market.

And it also sees potential in using parametric policies to cover other catastrophe risks beyond cyclone, across the whole country.

“We’re looking at other types of triggers,” Mr O’Leary says.

“Lack of sunshine or drought, excess average rainfall, extremes in temperatures, bushfire…all these are triggers that can be insured under a parametric policy for quite an array of different industries including agriculture, hospitality, sporting events, and renewable energy.

“Even the likes of commodity traders and commodity miners can insure property that they don’t own.

“So if a port was struck by a tropical cyclone, they could say ‘that’s going to impact our business so we’ll take out a parametric policy with that as the point of interest’.”

Epsilon believes Australia is particularly suited to parametric cover due to the extremes of weather that it is regularly exposed to.

“Catastrophe exposures in Australia have been under-priced for a very long time by the traditional insurers,” Mr O’Leary says. “The way pricing changes after a catastrophe event is testament to that.

“If we were able to take catastrophe right out of the property picture, you’d get a lot more consistency in pricing.

“I think parametric cover has the potential to be the new way that catastrophe exposures are underwritten in Australia, because it’s such a scientific process.”