The growing use of Parametric Insurance for high-risk industries

For high-risk industries, including construction, mining, renewables, energy, oil and gas, weather related events, supply chain disruption or commodity price fluctuations can greatly impact operations and revenue.

In addition, underwriters are seeing challenges caused by climate change, capacity constraints and pricing pressure for many lines of insurance. This can lead to concerns around premiums or coverage, and a reduction in appetite for lenders, investors and even for the companies themselves.

According to Aon’s Weather, Climate and Catastrophe Insight report 2022,  Australia saw a total of at least $6.95 billion of industry reported losses^[1].

Aon’s Weather, Climate and Catastrophe Report 2022 APAC found economic losses in the APAC region in 2022 reached USD 80 billion

• Roughly a third of the APAC losses were related to catastrophes in Australia^[1].
• Furthermore, the substantial protection gap of 86 per cent meant many disaster losses were uninsured^[1].

One way of mitigating some of the market pressures and risk exposures can be via Parametric Insurance.

Parametric Insurance utilises data from a variety of sources such as the Bureau of Meteorology, industry models and hardware that is installed at site to physically monitor weather events and their severity.

When traditional insurance cannot provide full coverage for natural catastrophe perils, this can often leave projects underinsured and in breach of arrangements with third parties such as key project lenders.

As the frequency and severity of weather events continues to increase, Parametric Insurance can be used to cover damage or business interruption not only at site, but also through the supply chain where weather events can interrupt aspects such as logistics and transport.

Cash flow and capital

As Parametric Insurance can be combined with traditional insurance solutions, it can help to lower the total cost of risk by allowing an organisation to proactively increase its program retention and use the associated premium savings to fund a portion of a parametric solution. By integrating the parametric solution, businesses can potentially free up capital by carrying less non-traditional risk.

Parametric Insurance for wind
Parametric Insurance can be used as an innovative financial hedge to compensate for lower-than-expected yields in energy production, such as lower wind speeds than modelled for a wind farm.

In addition, Parametric Insurance can be used to help protect against losses caused by physical damage, and windstorm exposure threats can be calculated and estimated against an index for maximum wind speeds.

Parametric Insurance for flood

One of the most frequent and severe natural hazards, flood may stop operations altogether or temporarily restrict access to a site.

Due to the recent La Nina weather events and changing climate patterns, underwriters are becoming more restrictive on providing full flood coverage where a high flood exposure exists. Parametric Insurance can help by determining appropriate thresholds for factors such as flood levels and rainfall amounts to trigger a policy response.

Parametric Insurance for fire

Both bushfires and wildfires have increased in frequency and severity across the globe. Damage or closure of a site due to fire can severely disrupt both operations and output. Parametric measures include satellite imagery, climate and weather data, historical impact data and even vegetative indices of remaining trees.

Complying with Lender Agreements

Most projects require a certain level of debt financing, and as such there will be Insurance provisions stipulated in those Lender Agreements. Those provisions can often require that full Insurance coverage is provided across all perils to the full value of the project. Where traditional Insurance coverage falls short of providing full coverage for a particular natural catastrophe exposure, then a parametric damage product can be used to potentially provide additional coverage should damage occur as a result of an event. This can help in ensuring that the project developer or owner remains compliant with any contractual obligations.

The Combined Hazard Information Platform (CHIP) and its power when combined with Parametric Insurance

In addition to Parametric Insurance, CHIP solutions consider technical peril rates and average annual insured loss values to allow for more confident, consistent risk assessment for the different loss drivers for each individual building across Australia and New Zealand.

CHIP has also evolved to include physical risk quantification for future climate change across all weather perils impacting the region using local climate projections and scientific research partners to deliver a true quantification of risk at site.

When CHIP is combined with Parametric Insurance, it can assist in the analytics required for parametric solutions, risk modelling parametric structuring.

When working with underwriters, quality information is key to capture risk correlation

Because projects face different risks throughout their life cycle, it is important for companies to be aware of the risks relevant to them from scoping to closure.

While Parametric Insurance can assist with more accurate modelling for insurance coverage, many data points are required to be adequately input from both brokers and clients to deliver the most appropriate agreed coverage. Aon can assist in advising clients to determine how to get the best outcome from their parametric solutions.

Aon can help evaluate the impact of climate and severe weather risks on your business operations and work with you to develop tailored protection solutions. Contact us for more information.

[1] Aon- Weather Climate Catastrophe Report 2022 APAC

[2] https://www.aon.com/weather-climate-catastrophe/index.aspx