Business owners in some regions of Australia are grappling with the issues of insurance availability and increasing premium costs as insurers react to extreme weather events and natural perils by withdrawing from the market, reducing cover or increasing prices. A non-traditional form of cover may offer a solution. Parametric insurance, sometimes also known as weather index insurance, is expanding in scope with applications beyond the rural sector.
Along with devastating fires, floods and cyclones other perils such as thunderstorms, hail, drought, flash floods and landslides can also damage property or prevent businesses from operating. Parametric insurance is designed to respond to the peril itself, with payouts automated when a trigger event is recorded by a third party such as the Bureau of Meteorology.
Gallagher National Head of Agriculture, John van der Vegt, says that since plantation insurance capacity reduced significantly following the 2019/20 season losses, parametric fire insurance has filled the gap. Parametric insurance is also being used for cyclone cover and in New Zealand for earthquake cover.
"The parametric insurance market is a new sector in the industry providing new capacity," van der Vegt says. "An organisation's risk management strategy must evolve to not only reflect their growing and changing risk profile but also take into account the innovative offerings we are seeing in the alternative risk transfer market."
The business or property owner simply chooses the type of event they are concerned about which is linked to available historical data (rainfall level, high or low temperatures, frost cover, dam heights, waterway depths) and nominates the amount they want to insure for. The insurer then determines pricing based on the historical frequency and severity of events in their area.
Van der Vegt says this works well for catastrophe type events (low frequency/high severity) and offers a number of advantages, including speed of payout and ease of obtaining cover. "I like them because they are simple," he says.
This means businesses seeking cover can apply by answering a few questions, rather than filling out forms.
The business owner determines the trigger event and simply nominates the dollar amount of cover they require, so there is no need to list your assets.
The business owner doesn't need to nominate the type of loss they incur. It could be property loss or damage, loss of access, business interruption, increased costs, future loss of profits or a combination of all the above.
Once the trigger event occurs payouts are speedy as there is no loss adjustment process.
Van der Vegt believes the scope of parametric solutions to fill gaps in the cover offered by the traditional insurance providers is likely to increase to meet demand as major weather events continue to impact businesses around Australia.
"It's a very innovative market with new products being developed by insurers as they identify peril-related gaps in the traditional insurance market and secure historical datasets to underwrite the risks," van der Vegt says. "The types of cover offered will expand: watch this space."
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