Aon Benfield and Swiss Re launch innovative weather coverage

Increasingly adverse weather conditions are creating challenges for UK insurers that need to be addressed. The recent cold snap in the UK has already cost insurers millions of pounds in losses. Despite many firms having traditional reinsurance cover in place, insurers’ net retentions often suffer periods of increased frequency in loss activity. As such, new reinsurance solutions must be developed.

That is the view of broker Aon Benfield which, in conjunction with Swiss Re, has developed a new product called WExcess, designed to provide reinsurance protection linked to weather indices while keeping costs as low as possible for the insurer.

WExcess uses data from the UK Met Office and customisable parametric triggers, which allows it to tailor solutions to each insurer’s individual risk profile and protection requirements. “This is the first product of its kind,” said Kurt Cripps, UK and Ireland team product leader at Aon Benfield.

An insurer’s historical loss data is overlaid onto historical weather data by weather expert, CelsiusPro, to identify regular correlations between loss history and adverse weather. Where correlations are identified, these periods can be ‘carved out’ of the net layer and reinsured by Swiss Re.

The insurer specifies the trigger mechanism and level of retained risk. For instance, the insurer may want to be indemnified for each day in the year that temperatures fall below -10 degrees Celsius, in excess of the first three days this condition is met. The trigger can even be tailored to regions of the UK, as weather data is collected from a host of weather stations throughout the country. In this way, potential spikes in loss activity are removed from the insurer’s net layer.

While weather affects every line of business, the primary focus of the WExcess product for now is on property, motor and agricultural claims. The product provides an alternative to aggregate catastrophe reinsurance coverage and can offer lower retention levels than traditional reinsurance solutions.

“The loss suffered by the insurer is calculated using a pre-arranged trigger, which can be customised to business requirements. It is calculated and agreed at the commencement of the policy on the basis of the insurer’s loss history; no further proof of loss is required in the event of a claim. The trigger is highly transparent and is calculated by leading experts in the weather risk management environment,” added Cripps.