Connected parametric insurance contract to trigger auto payouts: Clyde & Co.

Law firm Clyde & Co. has developed what it’s calling a first, a connected parametric insurance policy that runs on smart contracts and can automate payouts for weather-linked risk transfer arrangements.

In the first implementation, Clyde & Co. has developed a revenue or production shortfall parametric insurance policy for a solar energy producer.

Similar to other weather risk transfer products for the solar energy world, the insurance contract is designed to cover the risk of a shortfall in expected energy generation due to unfavourable weather.

In this case the so-called “connected parametric insurance contract” receives inputs from weather data providers and can make automatic payouts, as the contract executes when it meets or exceeds the necessary predefined parameters.

Lee Bacon, Partner at Clyde & Co and co-founder of its tech initiative Clyde Code, explained, “A connected contract is a digital agreement which links external software systems and data sources to enable the automatic execution of insurance contracts. By using real-world data and streamlining processes it offers significant cost and efficiency gains for the industry.”

Clyde & Co has created this first-of-its kind off-the-shelf connected parametric insurance contract through its smart contract consultancy, Clyde Code and in collaboration with smart legal contracts platform Clause.

The parametric insurance contract has been developed according to the specifications developed by the Accord Project, a non-profit, member-driven initiative that builds open source smart contract and distributed ledger related code and then provides the necessary documentation to enable smart legal contracts.

Clyde & Co. also noted that this connected and smart parametric insurance contract can also be deployed on other systems and platforms.

The contract consists of a data model, necessary logic code and a supporting natural language contract, which along with the needed data input sources can automate the performance of the policy by receiving the weather data, calculating any potential claims obligations, and producing an exportable report of insurance premiums or losses.

In this case the smart and connected parametric insurance contract facilitates the provision of responsive insurance to a solar energy producer against energy generation shortfalls caused inclement weather.

Clyde & Co. said that it intends to use this model to develop other smart connected parametric insurance contracts for different use-cases.

Bacon continued, “Connected contracting will bring many benefits to our clients and we are looking forward to expanding the scope of this product to cover different types of insurance and reinsurance agreements to meet client demand. Its launch is an exciting new step for Clyde Code and our work to help clients realise the potential of smart contracts.”

You can read more about this use-case and the development that went into it here.

This is particularly interesting, as many have tried to develop smart contract based parametric insurance products, but their commercial application has so far been limited.

This launch from Clyde & Co. could provide the necessary legal foundations for smart contract based parametric insurance to gain wider adoption, as well as legitimizing it in front of corporate risk buyers.

Imagine a smart parametric insurance contract connected to the hurricane-hardened wind anemometers of New Paradigm Underwriters, for example.

That could be used for both insurance and reinsurance purposes and as the trigger could include data inputs from multiple anemometers, as well perhaps as additional inputs, the basis risk could be minimised through intelligent trigger design as well.

As parametric triggers increasingly gain adoption around the world, especially for climate and weather related insurance, and capital markets transactions for sovereign disaster risk provision, connected contracts and smart contracts could become increasingly useful.

Their application in the renewable energy industry, where data is abundant and more easily linked to output is clear.

But perhaps they can also be put to good use in sectors such as retail, where large retailers could tie together weather inputs, with revenue generation factors such as footfall, or supply chain factors, to create wholly new insurance categories that can assist in transferring some of their business interruption type risks.

Automating the processes of claims and payouts within a parametric insurance contract is likely to drive future premium growth, for those innovative enough to design and develop new forms of insurance and reinsurance. Clyde & Co’s work here provides a useful contract example that can be put to wider use in future, we’d imagine.

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