Arbol, a technology-led company focused on parametric risk transfer and weather insurance markets, has launched an intriguing new solution named Captive+Parametric, which is designed to help corporations better manage climate risk and climate change exposure, with the help of parametric risk transfer to captive structures.
Launched in Vermont yesterday, Arbol, which utilises smart contracts and advanced tech to create its parametric risk transfer solutions, sees the new product as a tool that can help corporations put some understanding around their climate risk exposures, while also benefiting from captive related efficiencies and preparing for full risk transfer further down the line.
Calling Captive+Parametric a “first of its kind”, the service will offer a corporations an easy way to take immediate action towards climate change risk management, by transferring some or all of their definable climate risks into a captive insurance vehicle using a parametric structure.
“90 percent of Fortune 500 companies have captive insurers for managing traditional and emerging risks. As the demand for companies to better manage and disclose climate change risks grows as severe weather events become a greater point of global concern, the traditional risk management framework will need to account for risks related to climate and weather,” explained Hong Guo, Arbol’s EVP and Chief Insurance Officer.
“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. Arbol’s new Captive+Parametric solution will give corporations the ability to leverage Arbol’s proprietary pricing tools and climate data platform to easily implement this process,” Guo added.
With climate risk rising on the agenda of investors and shareholders, corporations need to be prepared and able to take action to demonstrate how they are dealing with what is effectively a balance-sheet risk.
Arbol’s solution will allow corporations to transfer risk off their balance-sheets, to a captive insurance vehicle, thus benefiting from the efficiencies that strategy can offer, as well as risk transfer.
Of course, a captive strategy is not always the same as full risk transfer to a third-party carrier, or risk and reinsurance capital source.
But what Arbol’s Captive+Parametric solution is ideal for, is educating corporations in how to achieve climate and weather risk transfer efficiently, while segregating and transferring the risks to a structure that could eventually be capitalised, perhaps collateralised, by other external risk and reinsurance capital providers.
That makes this an intriguing product that could be a stepping stone to full risk transfer for major corporations.
Corporations working with Arbol in this way gain access to the firm’s Arbol’s full suite of technology and data tools, including its data and Climate Intelligence along with the recently launched dClimate data platform; its online parametric risk transfer structuring and pricing tools; and rapid, automatic settlement of contracts using Arbol’s smart contract technology.
We assume that the Captive+Parametric solution will use some kind of multi-cell structure, so that corporations can transfer climate risk on a parametric basis to a segregated or protected cell.
To gain a little extra insight, we spoke with Arbol’s Chief Insurance Office Hong Guo, who explained that he sees the new solution as a great way for corporations to prepare for risk transfer to third-parties, while gaining insights and understanding into their climate risk, climate change exposure and also, importantly, how that will be priced.
“We envision a two-step approach for corporations to use captive for managing climate risks,” Guo told Artemis.
Further explaining, “Step one is to transfer climate risks into captives. The strategic benefit of this step is to identify and understand the impact of climate risks and take some immediate action towards climate risk management in response to the climate change response mandate coming from various stakeholders. Operational benefits such as tax are always there.
“Arbol’s streamlined “Captive+Parametric” solution will make this step easy to implement for both captive owners and captive managers.
“Capitalization might be needed to support the additional climate risks taken on by the captive, but this depends on the current capital status of the captive.
“Step Two is, after the corporations have a good understanding of climate risk impact, they can transfer the risk from captive to external market. Arbol currently provides such protections.”
For very large corporations, there could be significant benefits to segregating their climate exposures on a parametric basis in this way.
It provides the perfect base for a large-scale transfer of the risks to insurance, reinsurance, or capital markets, opening the door to possible solutions such as catastrophe bonds as well.
The captive insurer should be able to interface directly with reinsurance capital providers, as well as a special purpose issuer of insurance-linked securities (ILS), providing options that could be extremely valuable to a large corporate, while also making the transfer of risk quite efficient at the same time.