Tag Archives: parametric insurance

Insurance and IoT: The Perfect Match

The modern insurance industry isn’t just about processing damage claims—it’s about helping clients avoid them altogether. The Internet of Things (IoT) is reshaping the way insurance companies operate, with huge possibilities for the future, arming insurers with a smarter set of tools to better serve their customers.

In this article, I’ll diving into a few cutting-edge examples of IoT in action within an insurance organization and where I see the industry going.

Usage-based and parametric insurance

Usage-based insurance is already benefiting from the IoT by helping insurtechs offer more accurate and individualized policies based on customers’ behavior and use of the insured object. In the motor industry, Discovery Insure’s innovative Vitality Drive sensor is an example of such use-based insurance. With an integrated, low-power, non-intrusive wireless device attached to the windscreen, connected to a mobile phone app and able to transmit core driving metrics, Vitality Drive tracks driving behavior and allows Discovery Insure to offer incentives and rewards for better driving.

Unsurprisingly, the system has detected a strong correlation between better driving habits and fewer accidents and less severe insurance claims. By encouraging better driving by aligning insurance premiums with the lower probability of accident claims, this type of use-based insurance helps both insurer and customer and improves road safety in general.

Parametric insurance is described by the Center for Insurance Policy and Research as “a type of insurance contract that insures a policyholder against the occurrence of a specific event by paying a set amount based on the magnitude of the event, as opposed to the magnitude of losses in a traditional indemnity policy.” In other words, a parametric insurance policy insures against an event, rather than against loss or damage of assets. This helps to bypass – or at least greatly simplify – the process of calculating potential losses and making policy adjustments after a claim; meaning that parametric insurance claims are processed and compensated much faster than indemnity claims.

The advent and growth of parametric insurance has close links to the IoT, with more sophisticated devices and better connectivity allowing providers to both calculate and compensate more effectively. This is especially true in the case of natural disasters, which have long been notoriously tricky for insurers.

Wakam (former La Parisienne Assurances), another insurtech, makes full use of the IoT to improve customization and automation. Both tailoring parametric policies to their customers’ needs and automating the claims process benefit from the capabilities of these smart devices. Wakam has gone further and has introduced a private blockchain platform to process and manage parametric claims. The combination of IoT and blockchain technology allows parametric policies to be generated and managed intelligently, based on global, connected event data, rather than isolated public or private events.

See also: Despite COVID, Tech Investment Continues

Avoid damage claims with IoT

Today’s insurance industry isn’t just about processing damage claims. It’s about helping clients avoid them altogether. Insurers can use the power of data to create a more secure, connected world. The next generation of IoT-based smart security solutions overcomes the shortfalls of earlier technology to provide connectivity at a cost-efficient price.

The potential of modern IoT is almost limitless: protect homes and businesses with security alarms that aren’t susceptible to jamming; recover stolen vehicles with powerful, reliable tracking systems; and react quickly to emergencies in the home or business with connected smoke detectors and real-time water leak detection. The overlap with insurance is obvious – IoT data provides a smarter set of tools for the modern insurance landscape.

Discovery Insure, for example, uses IoT to tackle a major problem in South Africa, where 48,306 vehicles were stolen in 2019. Only one in five stolen vehicles were recovered. The process was usually slow enough that thieves had time to dismantle stolen cars or ship them to the other side of the world. Even if the car was found, insurers might refuse to compensate the victim if there was no physical evidence of a break-in. But IoT sensors allow cars to be found even when they are hidden in enclosed or underground locations.

The future of IoT in insurance

From 2019 to 2024, the IoT insurance market is expected to grow 60%. The number of use cases for IoT devices within insurance will grow along with it, with more electronic devices entering the consumer and business marketplaces year on year. Traditional insurers are looking to the future and working on digitizing their offerings to move forward faster and with greater agility. According to the Global Insurtech Market report published in 2020, the pandemic has accelerated the digital transformation of industry, a driving force in the commercial introduction of IoT. Thanks to this IoT, insurance companies are being given more opportunities to revolutionize and grow than ever – but taking advantage of them will require forward thinking and adaptability.

Closing the Protection Gap

Drought spells disaster for farmers across the developing world. Most lack insurance because conventional crop insurance is too expensive (where it is available at all). No rain means no income, no food and not enough resources to replant next year. With many countries from sub-Saharan Africa to Southeast Asia already facing an abnormal recurrence of climate risks, natural disasters around the world caused $232 billion of economic losses last year. Only a small fraction of this was covered by insurance.

Many developing economies depend on improving the productivity and resilience of sectors, including agriculture and tourism, that are vulnerable to climate hazards such as cyclones, heat waves, droughts and flooding. With economic losses from catastrophes growing faster than insured losses, adapting individuals and economies to climate-related impacts has become a major societal priority, outranking other risks like aging populations, terror attacks and social unrest. New insurance products designed to create disaster-risk-financing mechanisms, where no other risk-transfer tool is available, are increasingly being seen as part of the solution in closing this protection gap.

Many of these products are parametric, as opposed to indemnity, otherwise referred to as traditional, insurance. Increasingly recognized as a valuable form of transfer for climate and other natural disaster risks, parametric insurance contracts are based on objective and transparent indices, such as cyclone wind speed, earthquake shaking intensity or amount of rainfall, and payments start to be made as soon as the index reaches a preset threshold. As no costly visits are required to assess the losses, payouts can be made quickly to hard-to-reach insureds in remote locations. Crucially, protection against unpredictable but potentially devastating risks — previously unthinkable with traditional insurance — is now possible.

Rapid relief 

For the insured, ease of use, speed, certainty of amount of payout (without dispute) and the resulting ability to plan ahead ensure more rapid relief when disaster strikes, which in turn increases financial resilience. 

For the insurer, parametric insurance allows for a more scientific pricing of products that respond to specific isolated parameters, rather than the physical losses that might result from any number of a wide range of occurrences. Together with lower claims management costs, this scientific approach makes lines of business commercially viable that were not previously.

Contrast this with a complex insurance claim on a traditional policy, which may take a long time to adjust and be paid, due to the need to develop claim details and financial components as well as address issues like valuation and other conditions.

A hard sell

This does not solve the issue of how to persuade people in Africa, who are generally somewhat insurance-averse, to buy insurance. This form of risk management requires a certain level of prosperity, as it means spending money on something you hope you will never need. 

However, this challenge can be surmounted. African governments and policymakers understand the cost-benefit analysis, combined with the experience from developed countries showing that insurance can play a cost-effective role in a country’s efforts to increase disaster resilience. 

The African Risk Capacity (ARC), launched by the African Union in 2013, demonstrates what is possible. Set up as a mutual (known as ARC Ltd.), and designed to provide rapid payouts to covered nation state members, initially for droughts but planned to include floods, tropical cyclones and epidemics, the insurance pool started with four countries and now has a dozen or so policyholders and 34 member states. ARC has become highly efficient in pooling risks and their transfer at very low marginal cost to the global reinsurance markets and now protects tens of millions of people. 

This is a remarkable achievement when you consider that until recently the concept of selling droughts in Africa to the global reinsurance market would have been unthinkable.

Insuring the ‘uninsurable’ 

Parametric insurance solutions have mostly been used in the reinsurance space around catastrophe risks, but the boundaries defining what is “uninsurable” are being increasingly pushed to new limits. A policy covering hurricane-related damages to coral reefs was purchased in 2018 to cover a part of the vast Mesoamerican Reef along Mexico’s Yucatán Peninsula. Once verified, the agreed policy would be paid within one week. Such a rapid disbursement of funds is crucial as much of the initial reef repair following a severe storm needs to be done very quickly to avoid further damage and set up a successful recovery.

See also: Increasing Regulation on Climate Change

Not just for developing countries

These same innovative parametric applications being adopted in emerging economies also have significant potential in developed markets. In contrast to emerging economies, where the problem is more likely due to cover being unavailable, businesses in developed countries are increasingly seeking protection against losses for which traditional insurance is not best-suited. 

Emerging climate risks are a key driver behind this growing demand for more innovative insurance products in both the public and private sectors. The impact from a crop loss following a major weather event or supply chain delays is smaller in developed markets, but still significant. The Bank of England, for example, downgraded its expected first quarter GDP growth from 0.4% to 0.3%, following the impact on businesses from the “Beast from the East” – the cold weather snap that hit the U.K. in the winter of 2018.

Whether it’s reducing the protection gap, financing resilient infrastructure or improving risk management and return optimization across the financial sector, insurance technology and innovation has a decisive role to play in responding to climate risk and smoothing the world’s transition. While protection gaps remain an issue as greater costs are borne by the uninsured, these gaps are closing slowly. Innovative risk transfer structures and new products based on parametric triggers have a key role to play and will continue to help increase resilience of households and companies to growing climate risks.

Crowdsourcing 6 Themes for 2021

After the roller coaster of 2020, it’s a brave soul who’s willing to commit to what 2021 will look like. But running a global network of talented and successful people means that Robin Merttens and I have been able to dip into the collective wisdom of 20 of our friends and supporters from InsTech London.

In an hour-long Zoom call, we were able to crowdsource what is top of mind from 20 of the best people to predict the year ahead – those who are part of making it happen.

One investor, two reinsurers, three consultants, five Lloyd’s syndicates, six growing insurtechs and three others – all that was missing was the partridge and the pear tree.

You can now get the audio highlights (scrubbed and polished to perfection by the ever patient Peter Roach), and my match commentary, of the event on the InsTech London podcast episode 118. What follows are the dominant themes affecting risk and insurance that our panelists recommend you look out for — and why. We agree with Robert Lumley of Insurtech Gateway, though – the skill of making good predictions is about following the direction of travel.

Here it comes – from some of the sharpest minds at PKF, Munich Re, Swiss Re, EY, PWC, Deloitte, Brit, Talbot, Convex, Wakam, Chaucer, Concirrus, CyberCube, Blink, Riskbook, Flock, Zego, Insurtech Gateway, Voice of Insurance, Miller and FintechOS

Insurers must regain trust — consumers want more certainty

Charlie Burgess runs Munich Re international specialty business, and his responsibilities now include Munich Re Digital Partners. A major issue for Charlie is that trust in insurance has been dealt a double blow in 2020 — and resolving that must be a priority in 2021. The rejection of COVID-related claims has accelerated the need for people wanting more certainty between their loss and receiving a payout. This, according to Charlie, will drive more interest in new types of insurance such as parametric. We agree, and wrote at length on this in our October report “Parametric Insurance – 2021 outlook and the companies watch.”

The use of “price walking,” the practice by which insurers charge their existing customers more than their new customers, has also undermined confidence in the market. Look out, Charlie says, for a “short-term rush to offer great deals by insurers to win new customers before the new regulations come into place.”

Ultimately, though, the impact will go deeper, he predicts, fueling the rise of trusted brands from outside insurance stepping in to replace traditional insurance brands, particularly in personal lines insurance. 

We shouldn’t be too despondent, though. Nigel Walsh, partner at Deloitte, reminded us that the insurance industry did pay out billions of dollars in COVID-related claims in 2020. Nigel predicts (or should that be hopes?) that 2021 will be the year everyone starts to love insurance – and that the industry will finally fix its complicated wordings.

By the way, Nigel got his homework in early and has already published his predictions for 2021 – and I learned what gets Nigel going when we spoke earlier in 2020.

See also: 2021, We Can’t Wait to Get Going!

Better integration of technology, better standards and Lloyd’s Blueprint gets underway

By far the most popular prediction across our panelists was the rise of the platforms – our experts expect to see meaningful developments in the use of platforms, integration between technology and, in London, the progress and implementation of Lloyd’s Blueprint Two. John Needham, partner at PKF, and our sponsor for the night, is still hearing concerns from insurers he talks to about the lack of ability to integrate with the new tools that are available, and “frustration that they are having to choose a mainstream platform to play it safe.” Could this change in 2021?

Charlie Burgess welcomes the direction Lloyd’s is taking with its Blueprint but warned that implementation will take longer than planned. Charlie expects “a flurry of automation or digitalization among the Lloyd’s of London market players, both addressing the plumbing and digitalization in whole or some of the more complex risk products.”

Chris Payne, partner at EY, sees the development of a “more pronounced two-speed architecture model” as established companies grapple with overcoming legacy. According to Chris, people are “waking up and realizing that they want something leaner, where they can stand up new ideas or quickly test them, and then decide how they want to launch, whether through a new platform or more easily through their main platform.”

Christian Kitchen, head of technology and innovation at broker Miller, is also bullish about Lloyd’s: “It’s going to crack it this year. Blueprint Two is going to be exactly what we’ve always wanted. The core data record and the digital spine is going to be the framework that all of us build our new solutions on.”

Christian went on: “Now will be the chance for the agile organizations out there, including some of the brokers, to take what Lloyd’s is doing and build out the solutions and the end-to-end journeys that we’ve all been waiting for.” Christian is also optimistic about the opportunities this creates for what he refers to as the “real insurtech companies,” to start focusing on “groundbreaking solutions” as opposed to continuing to try to find work-arounds for legacy systems. 

Karl Lawless, sales director at FintechOS, adds: “Five months of lockdown was five years of digital transformation, and I only see that accelerating next year.” Karl believes the age of the large transformation project is over. “Rather than insurers committing to the traditional big-box solutions that cost tens of millions of pounds and take three to five years to deploy, there’s now an opportunity to deploy best-of-breed digital components, going down the Lego block approach.” Karl reckons we will start seeing components glued together with automation, giving a cutting-edge platform to those that use this approach.

Having spoken to Gary Hoberman, CEO and founder ,of Unqork earlier this year, I am sure low-code and no-code will be a big part of this. And with Unqork having attracted $365 million of funding, according to Crunchbase, clearly I’m not the only one to believe this.

Your platform will be arriving shortly…

Glynn Austen-Brown, partner at PWC, brought a global perspective to the predictions, with a reminder that we all expect technology to make things more convenient and to give us our time back. Insurance will be the next frontier for simplicity. “Look at what people are doing in China. Look at WeChat or Grab. We are going to be moving much closer toward that platform economy that is so prevalent in the Far East,” Glynn believes.

Mark Geoghegan, formerly editor of Insurance Insider and now the “Voice of Insurance” podcast host, advises us to look and see what technology choices the recently capitalized specialty insurers such as Inigo, Vantage and others make. Unlike the previous wave of start-ups 15 years ago these companies, with large amounts of investment, can choose to go with the new solutions and not rely on legacy. (But will they, I wonder?) Meanwhile, Mark predicts that “most of the insurance market is still going to be your friend because they’re not so nimble. They decided that they wanted to digitize three or four years ago, and they’re finally starting to get around to doing it.”

Ben Rose, co-founder of new reinsurance platform RiskBook, picks up on something Christian Kitchen mentioned and says the challenger brokers will rise to prominence in 2021. With the Aon and Willis merger coming up, and the acquisition of JLT by Guy Carpenter that we’ve already seen, Ben reckons that the new breed of brokers, which he observes has been recruiting many star players in 2020, “is really good for reinsurance innovation.”

Ben’s list of challenger brokers to look out for includes TigerRisk, Beach, Capsicum, Gallagher, Hyperion, Lockton, McGill, BMS – all are small compared with the big two. As Ben points out, they can’t replicate what the two giants are doing, so they’ve got to think digitally and about how they can use innovation. “They can’t afford the traditional six-person account team to look after a single client, so they are going to have to explore automation to handle those bigger deals and perform all the analytics expected of them with a much smaller team.”

Ben and co-founder Jerad Leigh are watching closely as these brokers start to move faster and spin up partnerships with start-ups to bring a digital service that’s been missing from the reinsurance ecosystem for quite a while. This is a topic I discussed at length with Rod Fox, CEO and Co-founder of TigerRisk, and with Barnaby Rugge-Price, CEO of Hyperion. And you can learn more about RiskBook from Ben when he joined us for the London leg of the ITC global tour.

Data-powered customers and risk reduction

Jenny Williams from Convex picked up on the theme of data, and she is thinking about it from a platform perspective, too. Jenny pointed to the recent news that S&P has acquired IHS Markit, a company that provides financial services and many insurers with data, for $44 billion: “We’ll see more partnerships and acquisitions in the data ecosystem space.” She added that “lots of different companies offer different variations of data on different assets and their risk and perils.” Companies (and InsTech corporate members) such as e2value and Hazard Hub are doing well in the U.S.

The challenge, according to Jenny, is that each specific data set requires expertise to collect and curate. Jenny is looking out for “more of a one-stop shop, targeted partnerships that may help reduce the offering overlap, while expanding the breadth of useful data that’s available to us.” We go deeper into this topic in my interview with WhenFresh CEO Mark Cunningham.

Christen Smith, head of sales at Flock, a growing insurtech company, echoes a point made by many others, that “customers and brokers aren’t going to be happy with the old solutions or with the old way of doing things. UBI (usage-based insurance) won’t be good enough any more.” Christen added that “we’re going to have to take the next steps into exposure-based insurance and really move the needle to impact consumer behavior.” Flock has recently expanded beyond offering commercial drone operator insurance into broader commercial insurance, no surprise then that for them “it’s going to be a big year for stepping things up a notch in the space of connected insurance, and really delivering for consumers and brokers in a new and different way than has been done before.” Watch this space. we say.

Glynn Austen-Brown picked up on an emerging but powerful theme around customers who are “looking for more services that are aimed at risk prevention and other value-add services, for example boiler servicing, energy bill usage reduction and help with home repairs.” Glynn also sees this theme as driving more partnerships and more embedded insurance — “things like Uber and Airbnb partnerships will become much more prevalent in regards to services and products that insurers offer. Customer stickiness will be everything.”

Data-powered automated syndicates

Andy Yeoman, CEO of Concirrus, expects to see meaningful progress from companies using data and algorithms, what he refers to as “technology-fueled market entrants.” We’ve seen Brit insurance launch the Ki syndicate and gain £500 million investment this year (my discussion with James Birch and CEO Mark Allan of Ki has been one of our most popular podcasts). 

Andy expects the newcomers are “going to use those algorithms to replace the work, whether it be submissions or some of the underwriting decisions,” and their role will change: “We’re going to see their use move from follow syndicates, to lead syndicates. And in doing so, all those organizations are going to create investable asset classes because they’ll ultimately have a predictable yield.” This will make insurance attractive for more external capital, with “trillions of dollars of pension funds monies” coming into the market, maybe not in 2021, but soon after. You can learn more about Andy Yeoman and Concirrus from our discussion last year)

See also: 11 Insurtech Predictions for 2021

But we need to deal with the data-ingestion problem

Of course, all these great opportunities for using data will fail if insurers can’t get the data they need. Jenny Williams is hoping that 2021 will “see some real progress in the very difficult area — submission and ingestion of data in commercial and specialty lines.” The problem that Jenny refers to is caused by the volumes of valuable data that is locked up in email attachments in non-standard forms that are received by underwriters. While the data may now be getting to the underwriters, it’s hard or expensive to extract. Jenny explained why. “It’s not just about ingesting standard forms such as ISO or ACORD; we’re talking about the really funky messy Excel spreadsheets with merged cells, multiple tabs and complex risk details that require real expert interpretation to identify the statements of values, loss runs, engineering reports, etc.”

Jenny is encouraged by some proof points from companies such as Eigen Technologies, Groundspeed, EY, Expert AI, that are among those she sees leading the way. There is more need for collaboration between the technology and insurance experts, but for Jenny it “feels like we’re at a tipping point, and this might be seriously commercially viable next year.”

11 Insurtech Predictions for 2021

Despite what we all feared in March, insurtech has continued to flourish, with lots of capital supporting the sector in public and private markets, closer integration between incumbents and startups and promising solutions for longtime needs in SME and cyber. Keeping up the annual tradition, here are my 11 predictions for the insurtech market in 2021.

1. Do you want insurance with that? Insurance will be embedded in every financial and retail transaction

Because no one loves shopping for it, we will see more insurance being sold as part of another transaction, where the user has a high intention to buy. “Embedded” has been a buzzword in fintech for several years, best illustrated by Buy Now Pay Later (BNPL) players like Affirm and Klarna. Embedded insurance started with travel insurance and extended warranties sold at point of sale, like Square Trade and Assurion. Branch Insurance now sells home and auto as part of the mortgage process, and Matic is embedding with mortgage servicers. 2021 will bring opportunities to embed insurance into transactions, with the goal being delivering a seamless experience of product plus protection.

2. 2021 will be the year for Plaid for Insurance

The original Plaid provides infrastructure to connect banks to financial apps like Venmo, which need access to a consumer’s bank account, so the user can take money from a bank and send it via Venmo, to the recipient’s bank. The explosion of financial apps drove dramatic growth at Plaid. Yes, the Department of Justice has sued to block the acquisition of Plaid by Visa. Worst case: Plaid is forced to go public at a valuation way above the $5.3 billion offered by Visa. In 2020, at least seven “Plaid for Human Resources” were funded. Data connections and enablement are critical across life, health and P&C insurance. In 2021, we will only see more pitches for Plaid for Insurance, and some of those pitches will be winners.

3. The robotic uprising: Automation will take over routine processes and improve customer experience

Automation will be used to support and empower the humans who are still in the process, starting with claims. Startups will accelerate the sale of automation to incumbent insurers, leading to improved customer satisfaction. Who wants to call an insurer to check whether the policy includes glass coverage? Consumers prefer to use their cell phones to text or speak, submit the claim and schedule the windshield replacement service. To show how quickly this change is happening: In 2019, State Farm ran ads mocking Lemonade’s bot; in 2020, State Farm led a venture investment in Replicant, which provides Voice AI to support human call centers. Faster, better customer service, which is cheaper for the carrier: Automation is a win-win with unstoppable momentum.

4. Playing for keeps: Deeper partnerships between incumbents and startups, accelerated by the pandemic

At the beginning of the insurtech phenomenon, way back in 2015, insurers responded by creating innovation groups and adding innovation KPIs to employee reviews. Following the law of unintended consequences, the result was incumbents starting a lot of experiments and proofs of concept with startups. It was frustrating all around, and many of those experiments failed. Now, insurers have moved the decision making back to the operating teams, and those teams are choosing partners to last. The pandemic has focused the efforts of incumbents. That focus will only get stronger going forward, as incumbents understand that they depend on startups to deliver the organization’s goals.

5. More startups will go full stack

Insurtechs will continue to take off their MGA training wheels. Following the high-profile IPOs of Lemonade and Root, 2021 will see full-stack carriers multiply. While the managing general agent model has the advantage of being capital-light and enables a startup to get to market quickly, structuring as full stack gives the startup maximum control over its product and customer experience. Capital is available to build a carrier, coming from multiple sources, as evidenced by sizeable fundraises by Pie, Kin, Hippo and several life insurance startups.

6. SME market will finally get the solutions it needs

At the end of 2019, I swore it was the last time I would predict the success of insurance solutions for SME. But there are finally some serious signs of success and traction in this market. Embroker, Vouch and Next Insurance continue to grow. And Bold Penguin has integrated with the flow of existing insurers, delivering value where incumbents could not. Finally, SME will have some good choices in protecting their businesses, thanks to persistent insurtechs!

See also: Has Pandemic Shifted Arc of Insurtech?

7. Achieving scale with coretech

Incumbents are yearning for alternatives to existing core systems, with an average age over 15 years, antiquated programming languages and vendor implementations measured in years. Two trends are providing hope here: no code/low code and coretech, delivering cloud-native core capabilities. The challenges of 2020 encouraged more incumbents and insurers to start limited implementations of no code and coretech. In 2021, we will start seeing a few insurers adopt these new approaches at scale.

8. Cyber insurance will lead the market in delivering dynamic risk protection

There have been many startups in cyber insurance, covering one of the existential threats for companies. Some startups have struggled by aiming at companies that are too small to afford the premium; others have chosen the wrong threat assessment partner and taken unwarranted risk. The whole market continues innovating and growing, which is good news, because cyber threats are also increasing. By combining real-time threat assessment with insurance, startup cyber insurers will deliver dynamic risk protection, enabling their customers to reduce risks as soon as they are identified. That may be a model for future real-time risk coverage in other business lines.

9. Parametric coverage will surge

Insurtechs will tackle claims costs and delays by eliminating the claims process, via parametric solutions. Defining a loss by reference to a standard objective index like rainfall in a specific geography is no longer reserved for markets like drought risk in developing countries. Now, insurtechs are delivering parametric cover for a range of risks, including earthquake, wind and cyber outages in developed countries. One driver is the user experience, where the insured no longer needs to trust the insurer to pay an indemnity claim promptly. Look for more kinds of risks to be covered by parametric solutions in 2021.

10. Record support for insurtechs at all stages

The pace of both early- and later-stage investments in insurtechs proves that investors remain enthusiastic about the market. Valuable business models built in fintech will serve as examples to its younger sibling, insurtech. There is still plenty of insurtech innovation to go around, and abundant capital to support it. We will see new launches and a record amount of capital raised across insurtech in 2021.

11. More big exits

The public market in 2020 has been the story of hot money looking for a home, and eager to pay up for future growth. Insurtech carriers Lemonade and Root went public via IPO, and Hippo is expected to become public either via initial public offering (IPO) or special purpose acquisition company (SPAC). Metromile became the first insurtech carrier to be acquired by an SPAC. These successful exits will drive continued investment in insurtechs that are taking big swings, and we will see more public exits. We can also expect more insurtechs buying insurtechs, like Bold Penguin’s acquisition of Risk Genius and Next Insurance’s purchase of Juniper Labs. The target will be filling a specific strategic need for the acquirer, and buying is faster than building.

In addition to going public, insurtechs will find other options, including strategic exits. Prudential’s 2019 acquisition of Assurance IQ created a lot of hope, but insurers have not yet shown a broad willingness to pay startup valuations. Brokers, always ready to spot the main chance, have made a couple of acquisitions and can be counted on to find deals that deliver focused value to their existing clients. Verisk, Duck Creek, Guidewire all have public currency, and at least the latter two have created long lists of partnerships with startups. There will be multiple insurtech exits in 2021, ranging from additive deals between insurtechs all the way to more IPOs.

Parametric Insurance: Is It the Future?

Read this, and you’ll be on your way to knowing more than 99% of what anyone else in insurance knows about a topic that’s attracting a lot of interest. That makes you an expert, in my opinion.

The debate is heating up just now about who should pick up the cost for messy losses — the kind that are hard to model and frequently excluded or defined rather vaguely in insurance contracts. Right now, of course, all the focus is on who should (and how to) cover the various costs arising from pandemics. Covid-19 today, and whatever hits us next time. The problem is being kicked around between insurers, governments and the capital markets.

One way or the other, we’re all going to end up paying, but life will carry on, and there will be even more need for creative solutions to the world’s tricky problems.

So it’s worth looking beyond this current bun fight to consider one innovative funding mechanism that has, in some cases, radically changed the most basic nature of insurance. It’s already providing at least one solution for covering pandemic losses and has been applied to many other complex or large events.

Parametric insurance offers financial protection against losses that are often hard, or even impossible, to get insurance for. Parametric structures are attractive to capital providers from outside of insurance (hedge funds, banks, pension funds and dedicated investment vehicles). When designed properly, parametric-based insurance products ensure that claims are paid fast, and without dispute.

In the second part of this article, I’m back to review 10 companies I recommend to watch that have been leading the way in designing or using parametric insurance and structures. But first, a quick primer on how parametrics work to get you in the mood for reviewing the recording of our InsTech London live chat event on BrightTALK from April 30.

Traditional indemnity insurance, the kind we are all familiar with, pays out based on the cost of the loss incurred, as decided by your insurer and its loss adjuster. Parametric insurance pays out when a pre-defined event occurs and breaches a pre-agreed figure or index. Examples of perils covered and typical triggers include hurricane (wind speed), flood (height), earthquake (shake intensity), pandemic (number of infections) or cyber (reported data breach).

The not-so-new new thing

Like a lot of great new ideas, parametric insurance isn’t actually that new. Catastrophe bonds, or insurance-linked securities (ILS), have been around for 25 years. It’s worth taking a moment to understand how that market has developed when considering what might come next.

Today, the ILS market provides $100 billion of protection, most commonly used as a replacement for conventional reinsurance or retrocession covers. The majority of that capital now comes from outside of insurance. Most ILS bonds still use traditional indemnity losses to define payout, but parametric triggers have been used for 15% of these bonds. Investors like parametric structures because there is less risk asymmetry between the investor and the issuer (the original insurer). This means that investors know as much about the risk being covered as the original insured does (not the case for indemnity insurance).

See also: Growing Case for Parametric Coverage  

Coverage for ILS bonds is usually in the hundreds of millions of dollars, and payment structures have become increasingly sophisticated. At the time of writing. the $500 million pandemic catastrophe bond issued by the WHO is considered to have a high probability of being triggered. (Steve Evan’s Artemis is the best source of information on catastrophe bonds. His (free) deal directory provides fascinating insights into the variety of bonds issued since 1996. Of these, 104 are parametric. Definitely worth a read when you’ve exhausted the Netflix movie catalog.)

Going back upstream and down in size

Ever since the earliest catastrophe bonds in 1997, there has been interest in making parametric coverage available to large corporations as well as insurers. Oriental Land, the owner of Tokyo Disneyland, took out a $200 million bond for earthquake cover in 1999 that was based on earthquake shake severity. It’s proved tough, though, for brokers to convince risk managers at large corporations to switch from conventional insurance structures to this new type of cover. Few have been willing to bet the company, and their careers, against mostly untested structures with significant costs and an element of basis risk. (Basis risk is the potential for the payout from parametric insurance to be insufficient to cover the true cost of the loss in the way expected).

The first wildfire catastrophe bond, for $200 million, was placed in 2018 and issued by another corporation, Pacific Gas & Electric (PG&E) the California utility company. Wildfire lends itself to parametric cover, but the bond was structured as a traditional indemnity cover. The bond was subsequently triggered and presumably paid out when PG&E picked up $13.5 billion in liability from wildfires in 2018.

The innovator’s tool kit

But you don’t need a $100 million problem to use parametrics. Parametric insurance is particularly interesting for people or companies looking at ways to introduce innovation into insurance. As you’ll see in part two, parametric insurance can actually work very well at a highly localized level, to provide cover for an individual building or field. Parametrics open up opportunities to those that can build, or tap into, a source of reliable data, preferably with years of historical records, that can be used to create indices that correlate with financial losses. These can be particularly valuable if the data source is exclusive. 

We’re seeing lots of interest in IoT, but to date there have been few public and credible uses cases for insurance applications. Parametrics and IoT are a natural pairing. Providers of distributed ledger technology (DLT), which can be used to power smart contracts, have been sitting on the sidelines for years now, patiently waiting for a problem to apply their solution to. DLT could be a vital part of parametric insurance, although hang on to your investment dollars for now. DLT is not always essential for parametric triggers. Other choices are available.

The established ILS market will continue to grow, but companies have, until recently, not had many opportunities to use parametrics — unless they had the appetite and chutzpah to issue a cat bond.

That is starting to change. Technology-enabled MGAs and brokers with clients that are struggling to get the insurance they need are starting to turn to parametric insurance. The concept has also been used for a number of years in microinsurance, as I discussed back in 2015. 

At InsTech London, we’ve been delighted to bring you many of the founders and leaders of teams running and building parametric products onto our stage, through our interviews and on our podcasts. Now we are also bringing you our favorites through our digital live chats on our BrightTALK channel.

I’ve seen the ILS market evolve over the last 20 years. Not every catastrophe bond has performed as expected when the wind blew or the earth shook (or indeed when the world’s banks hit the buffers in 2008). Parametric insurance is still some way from having complete solutions to many of the hardest problems. The world is full of surprises. Odd stuff happens at the edges of our experience. Some parametric solutions will fail to deliver. But innovation flourishes in adversity, and we are starting to see some very intriguing solutions emerging.

If you are looking to learn more about what has happened in this space, and how the future will evolve, then follow the link to the 10 companies I recommend looking at.

See also: COVID-19: Moral Imperative for the Insurance Industry  

If you’ve found this interesting, then you’ll definitely enjoy our live chat discussion on “The Role of Parametric Insurance in Post-COVID world” recorded on April 30 and brought to you and co-hosted with our friends at Qomplx.

Does all this make sense? Do you agree? Who’s on your top 10 of parametric companies to watch? Feel free to add comments, share and all the other fun stuff you can do with Linkedin these days. 

I co-lead InsTech London, bringing together the most interesting people with intriguing ideas face to face, online or however you prefer. Now up to episode 80 of the weekly InsTech Podcast, CII-certified (the podcast, not me). We’re delighted to be supported (i.e. get money from) almost 100 corporate members (with room for more) as well as a community of over 5,000. If you need a bit more in-depth analyses or help, head over to Abernite website to see what I am up to there.