It’s an increasingly connected world- digitally and physically- and that means occurrences there increasingly have effects on business existence here. ‘Effects’ means risk, risk means exposure, and exposure means need for insurance. Climate/environmental occurrences, urban congestion, or virus outbreaks have far reaching consequences. It used to be that businesses simply dealt with consequences over which they had no control in mitigating, and who was dealing with the issues were local to the effect or involved in the business or its collaterals. Is that true in today’s insurance world?
Patrick Kelahan is a CX, engineering & insurance consultant, working with Insurers, Attorneys & Owners in his day job. He also serves the insurance and Fintech world as the ‘Insurance Elephant’.
Daily Fintech– a top financial blog per Feedspot for Financial Technology Pros for 2020.
Few risks are more terror-inducing than an unmanageable viral outbreak with unconfirmed causation such as is the coronavirus outbreak focused on the Wuhan region of China. What to do other than quarantine the outbreak area, and limit individuals’ movement into other areas. Prudent. So, what do businesses do that are reliant on the movement of and visitation by persons? Airlines, hotels, transport, tourism, and commercial businesses will have significant direct and indirect effects of the virus due to reduced attendance from travel, tourism and just regular business. Compounding the effects for business is as reported by Insurance Journal, “companies are set to face billions of dollars (US) in losses linked to events and travel cancellations and closures of businesses.” Most standard commercial insurance policies have had exclusions placed for communicable diseases in the wake of the SARS, Ebola and Zika viruses, leaving the insureds to self-insure for these occurrences.
But what of parametric options? If you are a cruise ship operator whose business is reduced by 1/3 due to customer fear of an outbreak that happened across the globe, is there not a trigger/index that can be factored for in a parametric policy? Even more common for that business is passenger count reduction for a single cruise due to norovirus outbreak- or fear thereof. Same principle can apply to larger firms that may be affected in other industries- beaches, theme parks, tour providers, hoteliers, airlines, etc. The Sydney (Australia) Morning Herald reports that the country’s economy may be affected to the tune of $2.3 Bn (Aus) due to the coronavirus’ effects as students and tourists remain home.
The Wall Street Journal reminds the business world of the far-reaching effects of outbreaks in densely populated areas- the need to repatriate employees from outbreak areas, and mass closures of businesses, e.g., Starbucks, McDonald’s, IMAX, and other widely distributed businesses. China does mandate that employers reimburse employees for lost wages, but on a practical basis the effectiveness of those regulations is low. Risk exposure with little sharing of the cost of risk. But is there an opportunity for a micro-insurance product to protect individuals?
Are there other risks to which property owners or business operators are exposed without easy access to risk sharing? Sure. Regional perils, environmental perils, and/or climactic risks such as earthquake, flood, temperature extremes are a few of these. Flood insurance has been available for some decades but is not an easy match to insurance limits needed, and most often that cover is government subsidized and regulated, and is expensive if a subject property is in a flood frequency area. But what of those persons who own property in less sophisticated emerging markets? Well, more and more governments are looking to collaboration with other countries in establishing risk response pools, catastrophe bonds, or leveraging insurance linked securities (ILS) in smoothing the cost of disaster response. These are products that may not have existed as little as ten years ago, and even when present in a country’s emergency portfolio may not provide the expected benefits.
Take for example the risk vehicle Mexico placed prior to Hurricane Odile (2014), providing reinsurance for the country’s Fund for Natural Disasters (FONDEN). The bond was established as a hedge for when a hurricane met a certain central pressure trigger within a ‘box’ regional area. Good idea, unless the index values are not clearly defined in how the values are confirmed. The index was not met at that time but might have, except there was only one index measure point managed by one observer. Even if triggered the basis risk the country was exposed to would not have been met by the full release of the bond’s principal, supporting natural disasters as being global basis risk issues.
Considering the disaster ‘protection gap’ being most notable in emerging markets (on average only 5% of disaster losses having cover in poorer countries), there are organizations such as Global Parametrics(GP) that are working to improve access to cover by means of parametrics products. GP’s CEO, Hector Ibarra reports that a recent placement of parametric product produced advance payment to Oxfam and Plan International in anticipation of Typhoon Ursula in December 2019. The use of forecast-based indices (payments triggered on forecast of certain conditions) provided communities in the Philippines payment before the actual typhoon landfall, allowing evacuation funding for residents. Proactive risk sharing, with immediate payment upon reaching an index value. Not a perfect answer to all similar events, but certainly a start from which to build.
Are the principles behind parametric products adaptable to local risk factors that regions or businesses encounter but cannot find effective indemnity products for? Weather risk parametrics have gained a foothold within emerging ag markets in the form of micro-parametric products, with index factors of ‘on the ground’ conditions being verified by new techniques (sensors, satellite, drones). Larger scale weather-related ag parametric products are slowly getting traction and are beginning to supplant traditional crop insurance. In discussion with Norm Trethewey of Weather Index Solutions of Australia there are now more companies willing to underwrite smaller ag weather parametric or derivative products, say a $200K cover that used to be passed on by firms like Swiss Re and Munich Re. The presence of wider and deeper data sets there can be indexes established that in the underwriters’ estimation will be profitable and responsive.
The exhibit noted below shows some of the relative complexity of cover that is supported by available data and the sophistication of index monitoring:
There is not the same concerns of basis risk for ag parametrics because the value of the crop is known (within a range) so what remains is the farming business to calculate premium cost versus potential loss of yield. This sounds straight forward enough but changing the ag industry’s thoughts on what to do about Mother Nature becomes the nuance of the product. One thing is certain- as available data improves even more the underwriting of these parametric options will become more commonplace, for developed and emerging markets.
And for more extreme climate like there typically is in Australia, and where ag production includes upwards of 20 million exportable bushels of broad acre crops, having a spectrum of risk management options to include parametric and derivative covers is a potential stabilizing factor during spikes in conditions.
To wrap up this column is a short discussion of risks that simply may not have indemnity or parametric solutions, e.g., the number of, confusion caused, and accidents experienced through use of okadas (motorbikes) and kekes (three-wheeled vehicles) within the city of Lagos, Nigeria. One of the most populous urban areas on the African continent Lagos has waged a continuous battle against sprawl and traffic congestion. Add to that the easier acquisition of motorbikes and trikes compared to autos, and the growth of informal ride sharing using the more informal vehicles and you have traffic mayhem. The state government has banned the vehicles’ use, presenting survival mode for commercial ride sharing companies like Max.ng, Oride, and gokada.ng. Traffic risk, government risk, and no easy solution other than tossing the figurative baby out with the bathwater, and exacerbating the very commuting challenge for the city’s residents that prompted the popularity of the bikes and trikes. Thanks to the East African for the reporting on the ban.
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