Charley Grimston, chief executive of Altelium, explains how parametric insurance could be the ideal solution for the renewable market.
Climate change is a reality many have to live with and its impact on the insurance industry has been massive. Many businesses and households in areas regularly affected by floods or fires now find themselves uninsurable and on the other side, businesses are dealing with huge losses.
Swiss Re estimates the combined losses from wildfires worldwide equalled $14 billion in 2017 and flood damage from Hurricane Harvey alone caused economic losses of $85 billion.
In the renewable industry, severe weather conditions, which are becoming more frequent, are a significant risk affecting insurance decisions, which in turn affects investment options and profitability across the sector.
While there is great excitement in the electric vehicle market, the renewable energy industry which must power these vehicles has to protect and prepare itself for climate change and the vagaries of weather if it is to protect its profits in the long term.
In the short term too, insurance products and warranties can make a huge difference to cash balances and risk, and therefore investment appetite.
Only 40% of insurable natural catastrophes and man-made disasters are covered by insurance such as floods and fires. There is a growing protection gap as insurance companies and regulators demand more robust pricing models and capital management approaches.
As climate change and natural disasters increase in frequency, some are asking if it is ever possible to ‘manage’ or insure something so elemental and powerful as nature.
There is however a new type of insurance, described as the ‘the next cool thing’, which is perfectly suited to the renewable market. Called parametric insurance or index-based insurance it could transform the way insurance is bought and sold and the way we view natural weather events.
Traditional insurance or warranty products are based around an agreement which says ‘We’ll pay out up to a non-pre-determined amount if x happens to you’. With parametric insurance you say ‘If X happens, you will be paid a predetermined amount.”
It sounds like a simple change in grammar but actually it’s a complete change in thinking and has only been possible with the advent of new technology and analytical skills. It is a simple, frictionless exchange which completely takes away the need for the burden of proof.
The heart of parametric or index-based insurance is robust, highly granular external validating data. This is why it is developing so rapidly in the renewables industry because the quality of meteorological data, both in terms of frequency of reporting and spatial granularity has improved significantly.
While the validating or external data is vital for a parametric solution, it has to be combined with advanced AI and predictive analytics, as well as sector knowledge to give the holistic oversight needed to develop the appropriate index. Only through experience of the specific subject involved can the correct trigger event or index be selected. This must then be accessible in a data set which has enough cellular information for advanced analytics and predictive analysis.
This combination of deep sector experience and advanced analytics skills means parametric insurance is the preserve of tech disruptors and agile new businesses. Traditional insurance industry giants are struggling to find the tech specialists able to build the new data sets and information management systems required.
The following example highlights the opportunities parametric insurance opens up.
A football stadium roof is covered in solar panels. During the match, the fans’ electric cars and coaches are being charged with the electricity generated through the sun’s rays on the solar panels. If the sun doesn’t shine the parametric insurance pays out a pre-agreed event.
The stadium can then use this payment to cover for the electricity it had to buy from other sources to charge the vehicles. Or it could use the payment for new hot dog stands. The key point is that a payment is made based on meteorological data, with no burden of proof from the client and no loss adjuster involved. The trigger event is the sun not shining, proven (and predicted) through third party data.
A similar situation could involve wind turbine energy creation. Turbines can be damaged through too much wind. Rather than wait for wind damage to occur to trigger an insurance claim, parametric insurance would pay out when wind speed reached a certain level, removing the need to prove damage and the time and cost that this involves.
The entire process is managed through one end-to-end system where the insurance is bought and sold online. Index terms are upfront and understood, payment for the cover is made online and following the trigger event, payment is automatically paid out, also online. A completely frictionless, streamlined insurance process.
It is the smooth simplicity, made possible through the most advanced data analytics and information systems, which has caused the industry to describe parametric insurance as ‘the next cool thing’.
Parametric insurance is already working to protect investment in the renewable energy sector, proving that there is a way to work with nature rather than against it which is surely the more sustainable route for the future.