Arbol, an insurtech platform underwriting climate and weather insurance, has delivered a $10-million parametric insurance payout to property and casualty (P&C) company Centauri Insurance, only weeks after the hurricane struck in late September.
This is the first known parametric insurance payout for damages related to Ian, according to Arbol. It was made less than three weeks after the Category 4 storm made landfall in Florida. Arbol used a combination of “non-traditional and traditional sources of capital” for the reinsurance payout.
“We structured a parametric insurance contract that customized the triggers to meet the needs of [Centauri’s] standard home insurance portfolio,” said Siddharta Jha (pictured), CEO of Arbol. “The parameters are based on hurricane track data, the wind speed of the hurricane as it passes through different local points in the state, and so on.”
Arbol has the capability to track hurricane data to a high accuracy, Jha said. The Arbol CEO also co-founded dClimate, billed as the world’s first decentralized climate information marketplace.
With reliable access to weather data, Arbol can determine whether policies have been triggered and calculate the payout soon after the storm has passed. The process contrasts that of a traditional insurance policy payout, which can take months, if not years after damage was incurred.
“Every aspect [in parametric insurance process] is fully transparent. The contract stipulates exactly what the payout will be for different triggers,” Jha said. “We have a significant amount of technology to calculate hundreds of thousands of payouts and aggregate them in a matter of hours.”
Hurricane Ian has been dubbed the costliest disaster of 2022, contributing between $50 billion to $65 billion to an estimated $115 billion in global insured losses, according to Swiss Re.
For Jha, parametric insurance is uniquely positioned to address climate risks. A non-traditional product, parametric insurance provides coverage based on a predefined set of metrics or conditions, rather than the actual value of the losses.
When a certain parameter is met – such as hurricane category or wind speed – the contract is executed and paid out. A growing staple for catastrophe reinsurers, parametric solutions are now also becoming popular in the retail, agricultural and travel spaces.
“[Parametrics] introduce scale and efficiency to the insurance process, compared to the standard model of settling claims via a subjective loss report from an adjuster,” Jha told Insurance Business.
Rapid reinsurance payouts could potentially save insurers from spiraling losses caused by Hurricane Ian. Florida’s property insurance market was already at the point of collapse even before the storm hit. A slew of insurers went out business in the state following a boom in fraud and lawsuits. Reinsurance pricing has also shot up due to rising hurricane risk.
“The reinsurance process is slow and cumbersome, especially after a large storm like Ian. It can take years to settle claims,” said Jha. “The industry is further burdened by a significant amount of litigation stemming from those claims, which add to the costs and the time it takes for everybody to get paid and start the process of recovery. Parametric reinsurance can give insurers clarity on rapid, transparent payment after a storm so that they can start paying their clients.”
As a non-traditional product, parametric insurance also has some drawbacks. The most cited is basis risk, which is the possibility that the insurance payout doesn’t match the policyholder’s losses. But Jha said this argument against parametric insurance is outdated.
“Your data is shows one thing, but your realization of actual losses shows a very different outcome. That risk was a big problem in the past, but a few things have helped,” Jha said. “Firstly, the datasets themselves have become more and more accurate and localized. Secondly, with more technological capability and more understanding of a client’s risks, we can now structure parametric policies that are far more tailored.”
The CEO argues that basis risk has flipped to traditional insurance, because “policyholders don’t know when and how much they’ll be paid.” Claims processing after a catastrophe can also be fraught with delays and inefficiencies.
“A lot of clients are starting to realize that it's preferable to have a data trigger that gives them clarity on when they’ll be paid after an event,” Jha said. “And that's really important when you’re recovering from a disaster.”
