As FloodFlash CEO, my focus gravitates toward certain news items as they float across my personal ticker. So far this year I’ve been drawn to the events industry re-opening and how we will finally be able to meet the brokers we work with across the U.K. and overseas, and then to the Met Office as the weather forecasts showed the first warnings that ultimately became Storms Dudley, Eunice and Franklin, all of which struck the U.K. in February.
These storms filled my newsfeed as wind, rain and snow pummeled the U.K., eventually leading to widespread floods. FloodFlash claims are almost entirely automated, so having that heads-up two days in advance has little impact. We have removed loss adjustment from the process, so there’s no need to mobilize early or book support functions. Nonetheless, I keep an eye on the events and trends that will affect FloodFlash in the coming hours, months and decades.
A career quantifying the probability of "black swan" events has taught me that the world is full of randomness. I sympathize with the unknowableness espoused by Nassim Taleb rather than the idea of pre-written destiny found in the world of Hollywood (although the latter makes for a better movie). However, trends sit below the randomness. The confluence of these trends has the power to steer products, companies and markets.
One such market, that of catastrophe insurance, plays host to two sets of unstoppable macro trends. Climate change, population growth and urbanization are all driving up annual catastrophe damages. And increasing computer power and the proliferation of IoT networks mean that mass-market parametric insurance is possible for the first time. These trends will shape the catastrophe insurance market for years to come. They are also why Ian and I started FloodFlash.
Those macro trends explain why parametric insurance has started to take hold. In this article, I want to explore three smaller but significant trends that are accelerating parametric growth. Together, they explain why parametric insurance has gone from a conference buzzword to form award-winning coverage used by clients worldwide.
#1: For the first time, all businesses understand what they need to survive a catastrophe
Catastrophes kill businesses. The U.S. Federal Emergency Management Agency (FEMA) says “90% of smaller companies fail within a year unless they can resume operations within five days.” COVID created a world in which every business is alert to the threat of being closed.
The best way to steady a business whose source of income is in crisis is to provide cash fast. This is where the gap between traditional and parametric insurance products begins to emerge.
Traditional claims employ an arduous loss-adjustment processes. Catastrophic flood claims take months to resolve. That’s months in which a business might have no source of income but plenty of debt in the form of mortgages, rent, staff wages or tax liabilities. When protecting a business’s balance sheet, you sacrifice time at the altar of perfect indemnity. Not just time waiting for the final settlement, but staff resource managing and chasing the claim, too. And, as FEMA says, time is the one thing businesses can’t afford to lose.
Parametric insurance uses pre-defined values for claims. That means insurers remove the value of damage from the underwriting equation, and with it the requirement for claim adjustment. Parametric claims happen in hours, not the months it can take traditional catastrophe coverage to pay out. FloodFlash paid a Storm Franklin claim in under six hours. In the wake of COVID, that’s what businesses demand, and need, to survive.
It’s a relief to think that you don’t have to bother with chasing insurance companies. Most businesses with any sort of business interruption spend so much time trying to sort out the claim[…] It does involve the individual running the firm, and usually the top person within the firm. To take away that worry so the people running it can just get on with their business is a hell of a relief -- Clive Steggel, whose business, CRS Consultants, flooded during Storm Christoph in January 2021.
See also: Parametric Insurance: 12 Firms to Know
#2: Hard markets drive insurance innovation
Like any other market, insurance has the dynamics of supply and demand. On one hand, there are people looking to buy insurance coverage for their risks. On the other are those with capital looking for a return by covering that risk. When there is plenty of money in the system, supply of capital is plentiful. That means lower insurance premiums and looser policy wordings: a "soft market."
When money flows out of the insurance market – typically due to paying out claims from one or a series of catastrophe events – the supply of capital tightens. There is less capital to insure the same amount of risk. Premiums rise, and risks are harder to cover. We are experiencing a “hard market” right now.
Insurance prices have risen consistently over the last few years, and COVID-19 has made capital and capacity even harder to come by. According to the Marsh Market Index, global property insurance pricing increased by 17% in Q1 2021, with U.S. prices increasing by 14% in the same period, capping off many months of increases.
One of the first casualties in a hard market is catastrophe coverage. When the supply of capital runs dry, insurers are more reserved about the business they write. Policy wordings tighten, prices increase and exclusions start to creep in. This is where parametric insurance comes into its own.
Parametric insurance is attractive in hard markets for two reasons. The first is the lack of uncertainty: Using pre-defined values for a claim means the insurer is exposed to fewer variables. Insurers pass that benefit on to clients as lower premiums.
The second reason comes down to how parametric covers are structured. If a client sees an unattractive price, they can adjust the parameters of the coverage to suit their budget. They might not get penny-perfect indemnification, but they have coverage in place to protect their cash flow and survive.
The adage that "necessity is the mother of invention" holds true in the insurance market. Previous recessions have hosted the creation of some of the world's most successful technologies. Necessity is now driving the demands for parametric covers. As a specialist parametric broker told me recently: “It has gone crazy since Christmas.”
#3: The word is out
I’m not the only person recognizing these trends. Venture capitalists concerned with what the world looks like in 10 years have also cottoned on. Renowned VC and early Facebook executive Chamath Palihapitiya announced his latest venture at the beginning of last year: OTT Risk, a platform for pricing and trading parametric business interruption coverage. Descartes Underwriting, Parsyl and Arbol have all announced big equity raises from VC funds in recent years. Not to mention the FloodFlash Series A raise announced earlier this year.
Fueled by this interest, new and exciting applications of parametric insurance principles are emerging and growing faster than ever. Clients, brokers, insurers and investors have woken up to the possibilities of simpler, faster catastrophe insurance, and they are already experiencing the benefits. The capital pouring into parametric insurance firms will fuel this growth.
These parametric insurance trends mean movement is accelerating every day. Based on the trends on my news ticker, 2022 is set to be a landmark year. By December, more livelihoods and more businesses in more markets will be protected – and survive – because of parametric insurance.