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Non-Cat Parametric Products Q&A: Mitigating against the winds of change

How parametric non-catastrophe weather products can keep businesses moving as the climate warms.

Catastrophic weather events have sudden and unforeseen impacts in hazardous hotspots, causing widespread damage to homes, livelihoods and assets. What can businesses do about slower, incremental changes which can affect clients for longer periods of time or without physical damage, anywhere across the globe?

With 2023 being the hottest since records began in 1850 and 2024 already showing signs of being hotter still, climate change is accelerating the frequency of perils such as excessive rainfall and extreme heat.

This year has already seen unprecedented temperatures in multiple continents; Southern Europe experienced both the warmest first quarter and continent-wide, the wettest period in nearly a century, whilst the United States also broke records in their hottest first quarter. Heatwaves across Africa and Philippines created widespread drought in the first quarter of the year, causing water shortages, crop failure and closure of businesses and schools due to resultant power cuts.

As these environmental conditions are incremental and spread out over weeks or months rather than unexpected events occurring with only hours or days’ notice, it can be difficult to insure against them.

Certainly, most standard insurance products will not provide cover for the economic loss which can occur when, for example, construction workers are unable to work in extreme heat, or specific crops fail to grow due to a lack of rainfall.

Whilst not nearly as impactful as hurricanes or earthquake over a short period, non-catastrophic weather is becoming a huge challenge to businesses by its continuous and increasingly risky nature.

To help protect clients, Chaucer have assembled a team of risk managers and climate specialists - Ed Byrns, Kevin Paley, Nathan Miles and Michael Swearingen - who together are focussed on creating parametric weather products.

Unlike many parametric teams which provide catastrophe cover following short term events with high wind-speed or Richter scale triggers, this four-strong team tailor products which will respond to specific environmental triggers which are not classed as catastrophe events, even including the absence of weather needed for certain business models.

We spoke to team leader, Ed Byrns, about what has brought them together again for Chaucer and how their offering will help clients mitigate increasing weather-related risk.

Q: You are all experienced in working together with climate data and the weather markets but moved on to other things. What has brought you back together again in this developing market?

In 2020 the pandemic changed general understanding of the insurance industry; when people learned that business interruption policies didn't pay out because their property wasn’t damaged, understanding of the fact that losses can occur in the absence of economies, increased.

Non-cat weather protection has been around for decades, but mostly in very niche markets via methods such as derivatives, accessed by few. With weather volatility increasing overall, not just in catastrophic events, there is a growing demand for solutions which are becoming ever more complex.

Chaucer’s Innovation team spotted this as a growth opportunity; providing tailored cover for the gap where environmental issues cause problems for businesses without a physical damage loss.

They approached me to put together a team of experienced risk managers and data scientists with the expertise to analyse highly specific geographical and environmental data and utilise bespoke indices, which is how we offer cover for non-catastrophic weather perils.

Q: How do you envisage meeting the changing needs of a developing range of clients?

We see work in three segments: Conventional, Calibrated and Custom.

Conventional products deal with the types of weather risk solutions that energy and agriculture businesses have been using for 20 - 30 years. The insurable interest focuses on loss of business from a single peril; temperature, rainfall or wind. Lack of wind for example, can become a big issue because wind doesn't have to destroy your assets to be a problem. Large scale wind turbines require wind speeds of between seven to nine miles an hour before they begin turning, so a sequence of still days which do not power the turbines, can put an energy company into a loss scenario.

This sort of environmental problem can impact other power generation markets in other ways - natural gas, oil, electricity - or agriculture, where typically lack of rain will be the parametric trigger.

Calibrated products are a bit more customised, creating marginal innovations where standard products don't work for a certain customer, but with a little twist they would. These are usually dual trigger, for example, the temperature must reach a certain level and the wind doesn't blow.

A calibrated product covers interrelationships using indices that count, for example, the number of days on which the temperature goes below the threshold of what machinery requires to operate, and also the number of days the wind is below a certain speed.

Custom is the same process but with more variables bespoke to specific geographies and local environmental threats. Weather is localised and individualised in how it affects people and businesses. Extremely hot weather, which is good for the air conditioner manufacturer, for example, may be problematic for construction.

Although snowfall has reduced globally in recent years, in specific territories, excessive snowfall can trigger the single largest uncontrolled expenses for a real estate operator, snow removal. Moving a foot of snow does not have the same economic impact as clearing six inches from two storms, so the agreed triggers become extremely specific to customer needs.

Q: As a new team working with products which can potentially have any number of triggers in any number of locations, what is your approach to business growth. Do you have any targeted areas?

Being a new entrant into the market, we have close relationships we’re developing, but we're open to working with anyone and would like to talk with brokers who are struggling to find solutions for their niche clients. Our background as a team generally comes out of the energy markets, so we can readily provide solutions for the renewable energy space, however, we can also develop products for other clients that experience weather related losses - drought protection in agriculture, for example.

We wouldn't say no to any enquiry because our products are all about data science; less the subject matter than the subject matter domain. If you're going to write crop risk, you tend to have to have agriculture subject matter expertise. If you're going to write parametric products, data science is your subject matter, so what we first work with is client data.

Published on 29.05.2024