New index-based weather reinsurance product WExcess launched by Aon Benfield

by Artemis on January 23, 2013

Reinsurance broker Aon Benfield has launched a new index-based weather reinsurance product for UK insurers in collaboration with reinsurer Swiss Re and weather risk management specialists CelsiusPro today. The product, called WExcess, is designed to provide UK insurers with a source of index triggered reinsurance protection against losses from severe weather conditions.

The UK has suffered a string of severe weather events in recent years which have caused insurers significant financial losses, such as extreme rainfall resulting in flooding in 2011 and 2012, winters which have been amongst the coldest on record and dry summers which have caused agricultural losses from drought. With the launch of WExcess the collaborating parties hope to provide a way for insurers to hedge against these risks using actual weather conditions to create triggers for reinsurance protections.

The underlying indices are based on actual weather conditions using official data sources, allowing transparent and flexible triggers to be created. The triggers will be customised and based on an insurers actual risk profile and protection requirements. This could be particularly suitable as a source of reinsurance cover for the most severe weather events.

Protection buyers will be expected to demonstrate an insurable interest and provide five years worth of data on their losses from weather perils, to enable potential losses to be estimated. This data will assist Aon Benfield to customise the product and create the right trigger for the cedents needs and helps to reduce the basis risk which can be inherent in index-insurance products.

Kurt Cripps, UK and Ireland Team product leader, at Aon Benfield commented; “This index-based product is seen as an alternative to aggregate catastrophe reinsurance cover and can offer lower retention levels than traditional reinsurance solutions. The loss which will be suffered by the insurer on the occurrence of the pre-arranged trigger, which can be customised to business requirements, is calculated and agreed at the commencement of the policy on the basis of the insurer’s loss history; no further proof of loss is required in the event of a claim. The trigger is highly transparent and is calculated by leading experts in the weather risk management environment.”

Aon Benfield hopes the product will provide a mechanism to reinsure against the frequency events which the UK has suffered in recent years. Insurers have often been on the hook for losses twice from these events, when paying policyholders and also due to increased retentions and pricing from reinsurers. Meanwhile reinsurers themselves have not been particularly hard hit by a UK weather catastrophe since 1990.

The WExcess product has been designed to be cheaper than traditional aggregate catastrophe reinsurance cover and can offer lower retention rates, according to Aon Benfield. The use of an index trigger for these weather reinsurance policies means that payout is transparent and no proof of loss is required given that actual weather data will be used to determine whether a policy is triggered or not.

The product can be used to structure weather reinsurance protection against temperature extremes, excess or insufficient precipitation and other weather impacts, meaning frost, drought and excess rainfall are all potential covers. This could be of great interest to UK insurers seeking an extra layer of cover for their portfolios of property, auto, agricultural or commercial insurance risks.

UK Met Office weather stations will be used as data sources for calculating the indices necessary to determine events that trigger the policies. Aon Benfield said that an example of a trigger that a client could use would be temperatures below 0°C for five consecutive days.

“This product has been structured in response to increased demand from insurers for alternative weather solutions. The recent severe UK winter weather is a good example of where insurers might purchase this cover as a means of protecting themselves against unmitigated losses, although the scope of WExcess goes far beyond just freeze, snow and hail events,” added Kurt Cripps.

Swiss Re will be assisting with the capacity requirements of the WExcess product, with Aon Benfield having an exclusive arrangement with Swiss Re Corporate Solutions and its carrier. CelsiusPro will be providing calculation services for the weather index-triggers.

Stuart Brown, Head Origination Weather & Energy at Swiss Re said; “Severe weather seriously impacts business processes and causes losses for our insurance clients across almost all sectors of industry. In recent years, we have seen the insurance costs of unpredictable weather events skyrocket, especially when it comes to property and motor lines. This new weather product gives insurers more protection against the costs of severe weather and this means that they can continue to offer highly comprehensive cover to their clients.”

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