Pinpoint risk: floods, EV batteries, and the future of parametric insurance

As technology has developed and the re/insurance industry has become ever more sophisticated in how it measures and manages risk, the role of parametric products, which pay out automatically whenever certain predetermined thresholds are crossed, has grown ever greater.

With the availability of precision sensors and data-measuring tools, carriers and clients can now manage their exposures and claims processes with the touch of a button, secure in the knowledge that the platform underlying the relationship provides an objective and timely view of the risk.

That technology also allows for ever more niche applications, and opportunities for innovative startups to more accurately price risk and serve customers.

Nyasha Kuwana is the product manager at FloodFlash, an insurtech firm supplying parametric flood coverage using a bespoke sensor that allows the client to set the precise trigger depth for water, with claims paid out as quickly as the metric is reached.

“If a flood event occurs, we’re able to measure it as it happens and we know when the trigger depth is met. At that point, we initiate payment, and that can happen very quickly: our fastest payout has been nine hours—44 minutes from when the trigger depth was met,” she said in an interview with the Re/insurance Lounge, Intelligent Insurer’s online, on-demand platform for interviews and panel discussions with industry leaders.

For clients, one of the major selling points behind the platform is the reduced need for costly and time-consuming loss adjusting processes, which add unnecessary expense to the claim and can prove frustrating for customers.

Kuwana says that clients initially find it difficult to believe that the process can be as swift and painless as it is, but once they get to grips with the platform, it provides significant value in terms of time and cost savings.

“As a concept it is easy enough to grasp, but when our customers first learn about it , they often think it is too good to be true, which is interesting,” she said.

“They definitely like the sense of control, choosing things such as payout value. They like the speed of payment, and the fact that it removes the need for loss adjustment. It’s not that loss adjustment is bad in itself, but it does bring a certain degree of uncertainty.”

“Given the risk areas, we have to go through a lot of the due diligence on the structures and the data.” Gethin Jones, Skyline Partners

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Filling the gaps

Gethin Jones, co-founder of parametric index provider Skyline Partners, which uses large datasets to create risk-transfer opportunities, believes that parametric cover can complement traditional insurance and help plug protection gaps that would otherwise be tricky to fill.

The firm works alongside Lloyd’s syndicates and other partners to provide the data necessary to cover complex risks such as business interruption from a violent event on the premises, where it would otherwise be difficult to quantify and cover.

It also deals with communications throughout the claims process, and Jones said this is one of the major selling points for its clients.

“It requires a lot of work up front, to make it simpler for the client at the claim stage. Given the risk areas, we have to go through a lot of the due diligence on the structures and the data, because if you’re paying out on data, you’ve got to trust that data to make those payouts.

“A great deal of effort goes into it, from both sides, before you can even get it into the market.”

Altelium, a provider of specialist cover for electric batteries, grew out of the renewables sector, where the business previously provided cover to traditional renewables in the wind and solar markets.

However, with the growth of battery storage and related issues, the firm started providing real-time data and coverage to predict the life of the asset, offering extended warranty to underpin the performance of the battery and help meet the growing demand for clean energy, said the firm’s co-founder, Charley Grimston.

Like Jones, Grimston agrees that education regarding the benefits of the product remains a key challenge for helping to grow the role that parametric insurance can play in helping protect assets for the green economy.

“What we’re seeing is an evolution in the energy industry. In the days of coal-fired power stations and other forms of gas and so on, the energy was not turned on and turned off at a moment’s notice. But we’re now in a situation where we’re trying to have a much more efficient allocation of the resources within the energy sector.

“The challenge is to meet the requirements of the contracts that are sold to those providers, which have penalty clauses for failing to supply that energy at a given time, or an unspecified time for a specified period,” concluded Grimston.

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