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The InsTech perspective... smart parametric insurance contracts
Blockchain • Smart contracts
The simplicity and speed of pay-outs are key benefits of parametric insurance. Pay-outs are triggered by events. Smart contracts, contracts based on a distributed ledger or blockchain which execute automatically based on a trigger, have been proposed as a solution to automate this process, from the input data to the pay-out. Broker Marsh recently announced plans to use smart contracts to automate parametric policies. Data provider AccuWeather is set to connect its weather data to blockchains, and Google Cloud plans to do the same with data it hosts—both for use in parametric insurance smart contracts.
Blockchains cannot connect directly to external data sources. An ‘oracle’ service is required to bridge the gap, allowing smart contracts to be activated by data from real-world sources such as weather stations. Arbol, Etherisc and OTONOMI are among the companies already using smart contracts to automate parametric insurance through oracle service Chainlink. The outcomes of their pilot projects are now encouraging others to join their ranks.
Our deep-dive report into parametric insurance examined the benefits and limitations of using smart contracts, explained the history of parametric coverage and profiled over 50 companies worth watching in parametric insurance. It was released in October 2020 and has had over 1,000 downloads. The report is free to InsTech London corporate members. Email email@example.com for an access code. Ahead of our update to the report later this year, let us know if you were not included or know a company that should be included in the update.
In the news...
UK • Weather
BirdsEyeView, which uses weather data to design parametric policies, has been announced as one of eleven companies forming the seventh cohort of the Lloyd’s Lab innovation accelerator programme. The InsTech London partners originally reviewed founder James Rendell’s business plan at the Norton Rose Fulbright Insurathon back in 2019.
UK • Travel
According to SITA, 24.8 million mishandled items of luggage cost the travel industry approximately $2.5 billion in 2018. MGA CPP Group has partnered with travel insurance agent Just Travel Cover in the UK to launch “Smart Luggage”, parametric protection for lost luggage during flights. Customers will receive a pay-out of £50 if their luggage is not located after 30 minutes, and £500 after 48 hours. The product is being delivered through Blink Parametric, a platform enabling various types of parametric coverage including flight disruption, energy and business interruption.
Blockchain • Smart contracts
Marsh has partnered with Chainlink to develop new parametric policies powered by smart contracts. Tom Markovic, Head of Financial Risk Products at Marsh USA, spoke on a panel at Chainlink’s recent smart contract summit. Markovic said that Marsh knew how to structure parametric policies, but the partnership with Chainlink would allow it to “get to the stage where these contracts are hosted on blockchains and settle automatically.”
Following the losses caused by Covid-19, a number of companies have been looking into offering parametric coverage for pandemics. Now, insurer Sompo International has announced an “Epidemic and Pandemic Protection Program”. The parametric product is triggered by civil authority restrictions resulting from international public health emergencies declared by the World Health Organization. In the product’s first year, it will be available only to existing clients of Sompo Global Risk Solutions.
Weather • Captives
Parametric platform Arbol, which has raised $9 million in funding, has announced a product for corporations to manage climate risk in-house. The service allows companies to transfer risk into captive insurers using a parametric structure. A captive insurer is a subsidiary wholly owned by its parent company, for which it provides insurance services. Hong Guo, Arbol’s EVP and Chief Insurance Officer, said, “We believe that captive is the best mechanism and that parametric protection is the ideal product structure for corporations to start actively managing mounting climate risks.”
US • ESG • Business interruption
(Re)insurer MS Amlin has invested in InQlusiv, an ESG-focused MGA based in the US. When it launches later this year, InQlusiv plans to sell parametric digital business interruption policies to small and medium businesses owned by women, LGBTQ people and people of ethnic minorities. The MGA is licensed in all 50 US states and will sell its products through a digital platform.
US • Weather • Blockchain
Google Cloud hosts weather data from the US’s National Oceanic and Atmospheric Administration, gathered from over 9000 weather stations globally since 1929. It has partnered with Chainlink to connect this data to blockchains, to be used in parametric crop insurance smart contracts.
Haiti • Earthquake
The 7.2 magnitude earthquake that affected Haiti on 14 August is expected to have caused $1.7 billion of economic loss, of which insured loss could be $250 million. The earthquake may have triggered parametric insurance policies including Haiti’s coverage from the Caribbean Catastrophe Risk Insurance Facility (CCRIF SPC).
US • Weather • Blockchain
American weather forecasting company AccuWeather has announced a partnership with Chainlink to connect its weather data to blockchains. AccuWeather named “parametric crop and natural disaster insurance in regions where it’s currently inaccessible” as a use case for its data in smart contracts.
US • Catastrophe
Around 40% of US households have less than $400 in liquid funds to draw on in an emergency. An article in the academic journal Economics of Disasters and Climate Change examines whether parametric disaster microinsurance, used to improve resilience in developing countries, could be implemented for low-income households in the United States. The article discusses the potential benefits and challenges, concluding that further research is needed into which delivery model would be most appropriate.
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