Descartes aims to revolutionise parametric earthquake risk transfer


Descartes Underwriting, the insurance technology (insurtech) focused managing general agency (MGA) that specialises in parametric and data-driven risk transfer products, has announced a new partnership that aims to revolutionise the way parametric earthquake risks are transferred.

seismograph-parametric-trigger-quakeDescartes Underwriting has partnered with the Global Earthquake Model (GEM) Foundation, an international public-private partnership focused on the development of open-source hazard and risk assessment software, tools and data.

Descartes says it is aiming to “accelerate the ‘data to resilience’ continuum by leveraging the state-of-the-art technology behind Descartes’ parametric insurance solutions and GEM’s open, transparent and collaborative approach to earthquake risk analysis at the global, regional, national and local levels.”

By strengthening both partners understanding of earthquake risk and optimal ways to transfer it, as insurance and reinsurance products, they hope to add value back to the global earthquake modelling community, while supporting fair and transparent parametric insurance and risk transfer structures.

The goal is clearly to create better, more responsive and ultimately saleable parametric triggers for earthquake risk, while also giving back in the form of science and research to assist in calibrating and constructing better models that serve a purpose for risk transfer.

Parametric earthquake risk has long been a part of the insurance-linked securities (ILS) market, including some of the very first catastrophe bonds.

The 1997 cat bond Parametric Re Ltd. transferred Japanese earthquake risk, while the 1999 Concentric Ltd. catastrophe bond is one of the most cited transactions to this date, being a parametric triggered structure for a corporate sponsor in Tokyo Disneyland.

To this day, parametric earthquake protection is a key area where ILS capital can be put to work, with investors often finding these arrangements an appealing addition to their ILS funds and portfolios.

So any advancement in how triggers can be constructed is positive for the ILS market, as well as for Descartes itself.

More importantly though, advancements in how parametric triggers and parametric risk transfer arrangements can be constructed and structured is beneficial for expanding access to insurance and risk capital, especially in underserved areas and also high-risk areas where coverage can be costly or come with a significant deductible and exclusionary language.

Parametric triggers can cut through the exclusions and cover the deductibles, making for a more holistic risk transfer approach.

We still need to see significant work on how parametric solutions are integrated into the broader insurance or reinsurance risk tower, but making trigger inputs more robust, defensible, flexible and customisable is a good starting point.

“This partnership will provide a framework for both organizations to work together in developing high resolution and scientifically robust earthquake hazard and risk data to meet the needs of public and private sectors for customized and more affordable earthquake insurance products. Our combined efforts can also contribute to better earthquake risk understanding worldwide and better earthquake insurance coverage,” explained John Schneider, GEM Secretary General.

“Partnering with GEM marks a milestone for both organizations and plays a critical role in providing the next generation of earthquake parametric insurance to clients worldwide. Through frictionless and transparent payouts following seismic events, our joint efforts will be instrumental in reducing the earthquake protection gap around the globe,” added Kevin Dedieu, Co-founder and Head of R&D, Descartes Underwriting.

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