Parametric insurance: Alternative risk solutions in a changing world

How can innovative risk solutions like parametric cover help corporations face long-term challenges such as energy transformation, supply chain disruptions, digitalisation and ESG-related requirements?

The world is witnessing a wave of short- and long-term trends that are destined to drastically shape the future of our society and our planet. 

Energy transformation, supply chain optimisation, digitalisation and ESG-related requirements are the main examples of how a fast-changing environment poses a wide range of challenges for those involved. Whilst obstacles create opportunities and, consequently, investments, both the public and private sectors are faced with extreme uncertainty on the one hand and a need to act on the other.

In parallel, the corporate world must lead the way and be the point of initial focus, given its tremendous potential for impact.

The insurance industry has long been considered, with some justice, as resistant to change. The results of this are evident in terms of industry resilience. Additionally, customer satisfaction rates have suffered and the protection gap has widened.

Nevertheless, there is a wealth of data, skills and drive to help enable the required changes to be implemented. While traditional underwriting will continue to be the main form of risk taking, corporations are increasingly adopting alternative approaches to better meet their business needs.

An example can be found in the climate action space. Swiss Re Institute estimates that rising temperatures could cut global GDP by as much as 14% or USD 23 trillion by 2050, compared to a world without climate change. Public and private sectors are now rushing to halve CO2 emissions by 2030. However, many of the technological advancements that are needed to combat global warming will carry new risks or cause existing risks to evolve.

It is likely that traditional underwriting will continue to play a key role in tackling the obstacles of Scope 1 emissions, as corporations' core production processes evolve accordingly. That said, tackling the challenges posed by Scope 2 and 3 emissions might require a more sophisticated approach and the demand for innovative solutions will potentially increase.

By leveraging a pre-defined index and a pre-agreed payout structure, parametric insurance cover ensures transparency and speed of payment, addressing the issues of uncertainty and liquidity respectively.

For instance, the abundance of data on natural catastrophes (NatCat), combined with extensive expertise inside and outside the insurance industry, has allowed NatCat parametric cover to increase in recent years.

However, does this also apply for these new risks related to energy transformation, supply chain disruptions, digitalisation or ESG-related requirements? So far, where there has been data, there has been a possibility of parametric insurance, but what happens when there is no historical data available? 

New technologies and innovation, by definition, come with a lack of historical data. In these cases, there is no basis for backward-looking approaches that combine exposure with experience. Therefore, non-traditional, forward-looking perspectives are becoming more and more necessary.

Can supply volumes be considered an index? Would sensors and digital twins open the door to reliable and verifiable data? What parameters could be used to respond to ESG requirements? What will happen if a supplier does not meet net zero targets?

There is no right answer to these questions as of yet, but a regular dialogue between the insurer and the insured is certainly the first step to implement an innovative approach. 

Get in touch with us today to learn more about our alternative risk transfer solutions that go beyond traditional insurance.