PGA Sompo launches parametric typhoon insurance for Philippines

by Artemis on September 2, 2014

PGA Sompo Japan Insurance Inc, the Philippines based subsidiary of Sompo Japan Insurance Inc., has launched a parametric typhoon insurance product designed to mitigate against agricultural damage from major storms.

Initially the typhoon product, which Sompo itself considers index-insurance but which appears a more simple parametric trigger structure, will be sold to agricultural customers in the Philippines, with the banana production market in Mindanao the first target market. After initial trials with banana producers the company aims to target producers of sugar cane and other agricultural products in the country.

The Philippines insurance commission gave final approval for the product recently. The product, named Typhoon Guard Insurance by PGA Sompo, is the first index-insurance (or parametric) product in the Philippines to use the occurrence of a typhoon as part of the trigger.

Typhoon Guard will pay the insured a predetermined amount if the center of a typhoon passes through a predetermined area of coverage. The parametric insurance contract can be triggered when the center of a typhoon passes through the predetermined area of coverage. This area of coverage is defined as the circular area with a radius of 100km, 150km, or 200km from the center of major cities on Mindanao island, Philippines. The insured selects both city and radius when purchasing the insurance coverage.

PGA Sompo Japan Insurance leveraged the wider group previous experience in developing specific typhoon insurance products for Japanese customers. The firm has a Typhoon Guard Derivative product which is sold in Japan which helped in the product design, while a new probabilistic typhoon model was built for the Philippines and a pricing tool was also developed.

The simple, parametric trigger structure, which interestingly features concentric rings in a similar way to the 1999 Concentric Ltd. Japan earthquake cat bond, is easy to understand for customers and will have applications outside just agricultural covers. The product could be marketed as a supplemental parametric insurance cover to companies with exposures to typhoon in the Philippines, allowing them to select a very targeted additional cover to top-up their traditional insurance when typhoons of certain intensity pass through the selected radius ring.

As is typical with index or parametric insurance in the Philippines the product is targeting smaller farmers first, to help to build disaster recovery funds enabling locals to rebuild their businesses post-disaster rather than simply being wiped out by typhoons.

However the future for these products could be much broader, with the right marketing and product design and PGA Sompo Japan Insurance has taken a very interesting approach of making this as simple and understandable as possible, something which could help it gain traction more rapidly than some past efforts. The more easily understandable the trigger is the better the uptake, tends to be the experience with index and parametric products in most developing countries.

It would also be interesting to see how Sompo would decide to reinsure a product like this, if it could build premiums to a level where reinsurance is required. It would be very simple to construct a parametric catastrophe bond to protect its losses from the sale of Typhoon Guard, something to watch out for as these index or parametric products become more prevalent.

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