The launch of a parametric product for climate risks may provide a glimpse into the future, says Jon Guy
By Jon Guy
While much has been said publicly, the insurance sector has been struggling with how to respond to the biggest threat facing its clients and the planet.
The industry has been quite bullish in terms of the role it can play in supporting its commercial clients with the transition to a net zero future as the world continues to warm.
However, this talk comes up against a backdrop of growing concern that the scale of the exposures climate perils can create will reach a point that will simply exceed the industry’s appetite and ability to underwrite them.
This conundrum has led to a hunt for innovative solutions – and broking group Howden has this week provided a new model that could form constitute one future approach.
Yesterday, it announced the creation of Howden Climate Parametrics, which brings together (re)insurance, climate and data expertise to focus parametric risk transfer solutions on what it described as “meeting the escalating demand for climate derisking capabilities across industries, financial markets and public sector”.
Pioneered in the reinsurance and energy markets, parametric insurance offers predetermined payouts based on specified trigger events.
A unique benefit of parametric insurance is the speed and transparency of payouts, which Howden says will be essential for financial institutions looking to hedge exposure to weather, carbon or commodity risks.
Howden explained that the growing climate demand was transforming the potential scope and scale of the parametric market.
“The universal push from regulators and investors to disclose climate risks, together with burgeoning high quality data sources, will accelerate this,” it added.
Howden explained that the new practice will be part of the solution to this increased demand for disclosure, delivering opportunities to help parametric insurance fulfil its potential to derisk the resilient net zero transition and protect natural capital.
What Howden’s move clearly signals is that the market sees the parametric approach as an equitable solution to the threats climate change and the transition to a net zero economy will create.
For insurers, a set payment triggered by an agreed and verified intensity of event will deliver certainty around exposures.
For the client, parametric solutions will provide clarity over what they can expect from their insurer and when. This is likely to spawn a new relationship between post-event recompense and pre-event resilience.
The payment from Howden’s new solution will be triggered not by damage, but by the severity of the event. Therefore, for businesses, the more resilient their operations are to those perils, the bigger benefit parametric cover provides.
A future move toward resilience – rather than restitution – has long been the roadmap many in the industry have predicted. It now looks ever closer.