For many industry stakeholders, the astonishing succession of floods across Australia have highlighted the inadequacies of traditional insurance. In areas where businesses really need flood cover – like Lismore in NSW – insurance can be unavailable or too expensive.
Parametric offerings have entered this market gap as an alternative way of dealing with natural catastrophes and climate risks. Payouts are triggered automatically, rather than the weeks or months it can take settling a conventional insurance claim.
Sydney based Ben Qin (pictured above) is head of North Asia and Australia for Descartes Underwriting, a firm that specializes in parametric insurance. Qin suggested that Australia is an ideal location for parametrics to flourish.
“The fact that Australia is a relatively mature market makes it a great hub for insurance and its intermediated business,” he said. “Everyone here understands the need to have capacity that’s sustainable and also cost-effective insurance, so it’s a great context to do this type of business.”
Qin said he’s also impressed by the welcoming attitude of broker partners here. Descartes is a Paris headquartered firm. Last year the agency launched its first offering in Australia: parametric frost insurance.
Qin says these new types of insurance offerings are a “step correction” in the market.
“Everyone’s going to be more cognizant of the escalating nature of climate change,” he said. “Think of it [parametric offerings] as more of a means to an end, an evolution to the next piece because all these nat cat events are not going to stop.”
He said the capital providers behind traditional insurers are not going to go back to the old ways of doing things and instead have become very risk averse.
“They can’t ignore the [climate] models and if they don’t really know the types of locations and the perils they’re asked to underwrite they don’t underwrite them,” said Qin.
He said the way of the future is to welcome innovations in the insurance space that provide different solutions to industry challenges. These solutions, he said, could be highly tech tailored and provide flexible insurance coverage options.
Despite the global economic shadows, Qin said a diversified portfolio of parametric offerings can withstand the current economic shocks.
“We make sure that no single event or no series of events in a single year can seriously impact us,” he said. “That means we need to write risks in a balanced way, both wet and dry risks across different parts of the world and also earthquake, which is non seasonal.”
Qin said this creates a “diversification effect” across their business.
“We have our clever people sitting in in the Paris hub, who specialize in climate science, data science and data architecture where they process an immense amount of data using machine learning and higher order AI [artificial intelligence] techniques in order to figure out what’s a good and balanced risk for our carriers and how can we deploy capital in a more cost efficient manner for everyone - and that’s on a global scale,” he said.
In 2021, Karen Hardy, an independent broker from Tully in Far North Queensland launched Australia’s first retail parametric cyclone insurance product – Redicova – for Northern Australia.
“With Cyclone Larry in 2006 and Cyclone Yasi in 2011, I’ve seen that communities fail because they have no immediate disposable cash available to them post-disaster and that’s when they need it most,” said Hardy, Redicova’s managing director. Her offering is backed by Lloyd’s Disaster Risk Facility (DRF).
Read more: The girl from Tully who wowed Lloyd’s
“It is purely and simply a financial band aid to get them through the tough times because there’s nobody after a severe tropical cyclone that doesn’t suffer economically,” said Hardy.
In an interview with IB a year ago, Ramana James, Insurance Australia Group’s (IAG) executive general manager for safer communities suggested that private sector solutions to the climate threat are a great way of stopping tax payers from footing the bill when a disaster strikes.
“I would say that collectively across sectors we have to not be afraid of leaning into innovation and new solutions and what happens with that is that you get new emerging, commercial opportunities as well,” said James. “I think the nature of the complexity of these events and how they impact on the economic system, means that there is going to be a suite of varied products that are going to enable us to support and enable customers to be protected.”
However, he said the rise of varied insurance products is not a sign that the industry has given up on providing affordable insurance in parts of Australia prone to natural disasters
“No, I think the industry is strongly committed to working with governments to make sure we don’t end up in the position where you’ve got uninsurable places, that’s not what any of us want,” said James.
“We all want insurance as a critical part of our financial system that enables individuals and then communities to recover and removes that burden from governments and ultimately taxpayers,” he said.
Ben Qin explains the ins and outs of parametric offerings, in this video interview.
