April 02, 2021
Recently, my colleague Steve had an opportunity to sit down with one of our partners, Global Parametrics (GP). Juan and Steve reminisce about the evolution of the weather risk market and discuss recent growth in Climate Resilience.
The full interview video is here:
I’ve enjoyed working with GP to integrate our Solutions Center for GP to link new clients to the Natural Disaster Fund (NDF). This is a great example of a rapidly growing ecosystem combining public and private funds to increase the resilience of poorer countries through various forms of insurance.
What is an “ecosystem” for Climate Resilience?
According to the Insurance Information Institute, catastrophic events are those that trigger losses exceeding $25-billion. Thankfully, catastrophic weather doesn’t happen every year. In fact, there have only been 15 weather events in the U.S. since 1980 to exceed $25-billion. (NOAA: “Billion-Dollar Weather and Climate Disasters: Events””).
Non-catastrophic weather-extremes, on the other hand, occur far more frequently. Events that reach the $1-billion economic threshold occur almost every year. (NOAA: Billion-Dollar Weather and Climate Disasters: Time Series)
In a 2018 IBM survey of 1,000 global C-level executives representing 13 industries and 15 countries, 99% said that improved weather insights can reduce their annual operating costs. They highlight both negative and positive impacts that translate directly to corporate income statements.
Fair or foul, weather is indisputably important to organizations. When asked how weather has impacted their organization in the past 12 months, executives responded that it happens in a variety of ways. While executives cited both negative and positive impacts, the balance tipped greatly toward the negative. More than half (53 percent) identified negative impacts to operating costs. Many also cited negative impacts to depreciation, revenue, business operations and insurance premiums, in that order. By contrast, executives cited operating and business model innovation, brand reputation and risk management as factors that are more positively impacted by weather.
These impacts — both negative and positive — translate directly to an organization’s income statement. A full 100 percent of the executives we surveyed said weather impacts at least one revenue and one cost metric in their organizations.
More than half of the executives indicate that at least three revenue metrics are negatively impacted by weather in their organizations, with on-time sales order delivery and forecast accuracy cited as the most negatively impacted. Only about a quarter cited at least three revenue metrics as being impacted positively, with revenue from new products or services as the most positively impacted. Just Add Weather: How weather insights can grow your bottom line – IBM Institute for Business Value
Large and small businesses can now mitigate the financial impact from extreme weather through Customized Parametric Insurance, Property and Casualty Insurance, Business Lines Insurance and/or Financial Derivatives. Relatively small preemptive premiums can provide significant financial recovery after extreme weather events.
When we say “ecosystem,” we’re referring to the network of companies that are working to build climate resilience through financial risk transfer. Our mission is to connect all stakeholders throughout the climate risk value chain. GP and NDF (and many others) are key to the overall ecosystem.
Demex emerged from Munich Re at the end of 2019. We formed a stand-alone endeavor with the risk capacity of Munich Re Trading and Nephila Capital along with Seed investment from Anthemis and IA Capital Group.
What is Parametric Coverage?
Parametric insurance is a form of insurance tied to measurable weather that affects a business. This could be temperature, snow, rain, wind, etc. When a measurement exceeds a threshold or “trigger”, the customer is paid automatically.
Traditional insurance protects from damage related to an event – such as a car crash, a fire, or a flood. When this event occurs, the customer submits a claim whereby an adjustor will assess the damage. The insurance company then pays the customer according to the amount of damage assessed. Parametric insurance doesn’t require damage assessment. Customers are automatically paid when the weather measurement exceeds the trigger.
- Parametric insurance policies complement existing insurance.
- No damage assessment is required.
- Payment is fast. Clients receive payment immediately.
- It’s simple; customers understand exactly what will trigger a payment.
For example, a cherry farm located outside of Traverse City, MI, wanted protection against excessive low temperatures in May, as a late spring frost could damage or kill their cherry flowers. By analyzing temperature data at the farm location, a parametric solution was developed. If the temperature in May dipped down to 26 ̊F, the farm was automatically covered. Since this policy was designed with their cost structure in mind and used local weather data, the farm could feel financially secure in knowing they could withstand a spring freeze.
While parametric insurance is often seen as a tool for climate change resiliency, linked to both catastrophic and non-catastrophic weather risk, it is also a kind of proof of concept for how to weave innovative technologies into the very fabric of the insurance industry. As more and more parametric applications are explored, there will be a wellspring of opportunity for incumbents who can identify the best use cases and put the power of the parametrics to work for their business and customers alike. Sibylle Fischer, “Growing Opportunities for Incumbents in Parametric Insurance” – Baloise Group
But why now?
Weather derivatives have been around since the 1990s. Modern insurance has been around since Enlightenment era Europe. Innovation in our case isn’t about transferring the risk … sophisticated businesses have been doing this for a long time! Today’s innovation is connecting to the Climate Linked Economics of the business. Recent scientific and societal breakthroughs are at the dawn of an era where finance, insurance, climate science, and main street can come together to create Climate Resilience for small and large businesses. Specifically, we’ve seen:
- An explosion in high quality, high fidelity, and highly localized weather data.
- Advancements in parallel processing and cloud computing that make crunching enormous datasets routine.
- Societal and corporate acceptance that climate change is affecting business and a drive to do something about it in the short-term.
Steve and Juan discuss these points further in this short clip from their conversation:
Demex is short for data empowered parametrix. Parametric is a mathematical term for any group of equations. Parametrix refers to a fundamental solution. That “x” marks the spot—a unique solution, by Demex. Contact us to learn more.