As the only insurer in Canada to offer an extra expense parametric insurance solution for multiple industry classes , we’re fielding lots of questions from clients curious about how they can use it as an extra layer of protection for their business or as a complement to their existing coverage.
At a recent Global Corporate & Specialty (GCS) client event, Joël Durand, Head of Business Development at CelsiusPro, shared some important details about how parametric insurance is being used around the world as a tool to protect against the impact of extreme weather events. Aviva Canada has partnered with CelsiusPro to provide Canadian businesses with access to this innovative insurance solution.
We sat down with Joël to ask him some of the questions on the minds of our large corporate and commercial clients.
What are some examples of external economic factors that parametric insurance could cover?
We know that uncovered damages due to climate change could cost the global economy $178 trillion (USD) in net present value from 2021-2070. Economic development, population growth, and urbanization, often in regions susceptible to natural hazards and climate change, are the main drivers of associated physical losses.
When economic factors are strongly correlated with natural catastrophes (CAT) or extreme weather, parametric insurance can protect against these exposures. For example:
- Agriculture: drought or excess rainfall during different stages of crop phenology impacting the harvest value
- Construction: excess rainfall or frost delaying finalization of construction site, potentially leading to additional costs or even penalty fees
- Event and tourism: excess rainfall, hurricane, or extreme heat leading to decreased revenue due to non-damage business interruption
- Property: hurricane, excess rainfall, or earthquake leading to property damage; parametric coverage can complement traditional indemnity insurance by covering certain uncovered layers
Do you provide multiple coverages per policy, such as crop at seedling stage and then at harvest?
Absolutely, and this is an example of how we cover the peril exposure when it's needed. In an agriculture example, a drought cover during seeding phase and an excess rainfall cover during harvest can be combined to cover the expected value decrease of the harvest.
Is parametric insurance more competitively priced than traditional (natural catastrophes) CAT coverage?
Ultimately, indemnity and parametric are complementary. We encourage programs that combine parametric and indemnity CAT in the same insurance tower and give the client the best features of both covers.
The best parametric solution responds in a way that allows a business to react quickly and resiliently, which reduces the overall quantity of a loss.
If you think of your parametric coverage as operating in the primary layer of CAT and your indemnity insurance as covering the excess, both policies can be competitively priced and can have a better outcome for clients’ experience.
What tools do you use to provide the necessary information for insurers to underwrite parametric insurance? For example, the National Oceanic and Atmospheric Administration (NOAA), which the US government is no longer funding.
We have fallback methodologies in every contract if, for any reason, NOAA becomes an unreliable source of hurricane tracking. The same goes for precipitation, temperature, or earthquake products—there is always a fallback methodology with an alternative data provider defined.
How much time is needed to confirm a payout?
This depends on two things:
- The availability of the underlying index data. Typically, this is real-time or has a latency of 4-5 days. The payout calculation can be done within a few days.
- Payment efficiency. Depending on the operational setup, the financial payment can take longer, but within 2-3 weeks a parametric claim should ideally be settled and paid.
Are there industries that would benefit more from this offering as additional coverage?
Parametric insurance started in agriculture (and energy sector). Agriculture is the most obvious one because crops are dependent on climate risks. However, more and more, we see property lines of business, such as construction companies or other general property clients, that seek this additional cover.
It could also be very useful in the event, tourism, and leisure industries. Parametric insurance could be used to stabilize financial income during years where there is extreme weather, and the resulting income is lower.
Are there any other industries leaning towards parametric insurance?
A new player or line of business is renewable energy. Sometimes energy companies commit to providing energy to a grid and if they cannot produce during peak hours, they may earn less income or even get penalized. A parametric solution could have a substantial role in steadying that.
One could provide a heat day cover to solar panel industries. If it’s too hot, solar panels don’t operate efficiently; if there’s no wind, wind turbines aren’t efficient; if there are drought conditions, a hydro plant could suffer.
How does Canada compare globally in adopting parametric insurance?
The way Aviva Canada approaches it is very innovative and forward thinking. Aviva’s focus on adverse events versus CAT events is unique. Being able to assist companies of various sizes and classes opens parametric insurance up to a much wider group of businesses that have a growing need for these products. In general, we’re seeing an increase in demand for parametric insurance globally and are very curious to see the further developments in Canada too.
Learn more about parametric insurance
Talk to your broker or contact us on gcs.ca@aviva.com for more information.
