Global Parametrics structures DFID-backed South Atlantic windstorm derivative

Global Parametrics, the parametric and index-based disaster risk transfer company, has structured a windstorm derivative transaction for a business on remote South Atlantic island Tristan da Cunha, with the deal backed by capacity from the UK Government’s Department for International Development, through the Natural Disaster Fund (NDF).

The windstorm derivative features a custom index and trigger developed and structured by Global Parametrics using the ECMWF ERA5 weather dataset.

As the nearest land-based weather station is located on on Gough Island over 400km’s away, Global Parametrics used its risk modelling technologies to develop a unique wind index based on the ECMWF data, against which the parametric extreme windstorm derivative could be priced and settled.

The parametric derivative will protect the Tristan da Cunha based Tristan Lobster Processing Facility, which is the main business on what is the world’s most remote habitable island.

The parametric risk transfer product was structured as a derivative issued by Global Parametric’s Natural Disaster Fund (NDF), backed by DFID, with Ovenstone Agencies (Pty) Ltd (the operator of the Tristan da Cunha Lobster concession) the counterparty to the protection.

Sustainably caught Rock Lobster is a critical source of employment for the inhabitants of Tristan da Cunha, with the product sold all over the world.

The fishery and processing facility faces the threat of extreme weather, in the form of South Atlantic windstorms, so risk transfer protection is critical to its ability to operate and provide the much-needed employment to inhabitants of the island.

With indemnity insurance and reinsurance hard to source for such a location and no local weather station being available, a modelled and parametric structure was developed to enable the windstorm protection to be delivered.

Toby Behrmann, Global Parametrics’ Innovation & Partnerships lead explained, “When we were approached by the Administrator of Tristan da Cunha, we knew that this unusual situation would be a test of our ability to provide a risk transfer solution in the most remote of locations where other alternatives are unviable, and we have passed with flying colours. This is a textbook case of Global Parametrics working together with Government and commercial partners to fulfil our mission of protecting fragile livelihoods in the face of extreme weather events.”

CEO of Ovenstone Agencies (Pty) Ltd, Andrew James, added, “We are pleased to have worked with the Global Parametrics team to develop an innovative solution to provide cover for the Tristan Lobster Processing Facility, a key Tristan asset that protects jobs and income on the planet’s most remote inhabited island, at a time when it is challenging to obtain traditional insurance cover.”

Daniel Wilcox, Private Sector Development Advisor at the UK’s Department for International Development (DFID), also said, “The UK Government’s Department for International Development, through the Natural Disaster Fund (NDF) was pleased to support this transaction. As a collaborative effort with our partners at the Foreign and Commonwealth Office such an innovative transaction outlines the importance of building resilience to extreme weather which is key to the ongoing prosperity of Tristan Da Cunha and other British Overseas Territories. I am delighted that Global Parametrics was able to structure a solution for Ovenstone Agencies (Pty) Ltd which will ensure the continued operation of the Island’s fishery.”

Global Parametrics said that its modelled approach using ECMWF ERA5 data for this windstorm parametric index trigger can be applied anywhere in the world, making risk transfer more broadly available to regions where perhaps it has proved harder to structure such arrangements.

It’s an interesting, albeit niche and likely small in size, transaction, that shows the potential for the application of technology on high-resolution weather data to construct useful, responsive parametric risk transfer structures.

In derivative form and backed by the NDF, a fund that is capitalised by public and also private capital, the solution shows the potential for parametrics and efficient insurance or reinsurance capital delivered through a fund structure, to help narrow gaps in protection where traditional solutions are much more challenging to apply.