The world of disaster risk transfer and financing for the developing world and development communities is getting increasingly interesting and relevant to the ILS world, with the latest news being the imminent launch of Global Parametrics, a parametric risk transfer provider backed by a third-party capitalised risk fund.
Global Parametrics is going to be unique in a number of ways, as it will target selling only parametric risk transfer and index insurance coverage to organisations which are largely unprotected today, as it aims to focus its products on areas that can help to reduce the protection gap and help to address under-insurance of poor, and vulnerable people in developing countries.
The mandate of Global Parametrics will be to offer parametric protection, backed by strong science and risk modelling, selling protection to the likes of NGOs, development banks, microfinance providers and even municipalities, while sharing the risk with third-party investors via an investment fund structure known as the Natural Disaster Fund (NDF).
Global Parametrics has been funded for launch by the German government’s Climate Insurance Fund, run by KfW. Although the mandate for Global Parametrics is to seek to be an independent going concern within a few years. The UK government’s Department for International Development has also supported the creation of this venture and is committed to its future success
Global Parametrics is a little different, as it targets becoming a sustainable, profit-making venture, while looking to help increase penetration of insurance coverage for weather, catastrophes and natural disasters, by targeting clients and populations that currently do not have this type of protection.
At the World Humanitarian Summit in Istanbul on May 23, Baroness Verma, the UK’s Parliamentary Under Secretary of State for International Development, revealed the initiative saying that the UK, alongside Germany and partners, was planning “to develop a transformational parametric insurance venture, Global Parametrics, and a Natural Disaster Fund.”
The developing world sees significant inward capital flows and investment, from organisations working in the region, those providing financing, humanitarian assistance, infrastructure and other investments. A large amount of this capital and often the poor, and vulnerable beneficiaries are at risk from severe weather or natural catastrophe events, but do not have any protection or financing that specifically targets these exposures.
Global Parametrics will offer derivative risk transfer products to enable these organisations to better protect their financing and operations against the impacts of catastrophic weather or natural disaster events.
Using parametric triggers, based on weather indices or natural disaster variables, the coverage provided by Global Parametrics will be quick to respond and payout when disaster strikes, which is vital in developing markets and for the development community operating there to assist the local population.
The Chief Sponsor of Global Parametrics is Jerry Skees, of GlobalAgRisk and formerly the University of Kentucky, an experienced science and modelling focused weather, climate and disaster risk professional who has worked on agricultural insurance, weather-index insurance and derivative type programs for over three decades.
Among those joining Skees in the venture is Bernard Van der Stichele, previously managing ILS investments and analytics at AQR Capital Management and the Ontario Teachers’ Pension Plan (OTPP), who will serve as the Chief Technology Officer for Global Parametrics. In the near future, the CEO will be announced.
Sitting behind Global Parametrics will be the Natural Disaster Fund (NDF) fund, capitalised by public financing as well as by third-party capital providers, which could include ILS investors, funds and even other traditional insurance or reinsurance companies.
With limited funds in the NDF at launch, Global Parametrics will quickly turn to the traditional reinsurance and ILS markets to co-share risk with it; thus welcoming the market in to participate in these offerings in low and middle-income countries.
Recognising that the ILS fund business model can bring significant efficiency, Global Parametrics aims to be capitalised by this fund for its underwriting activities, with investors in the fund sharing in the returns of the pool of risk.
And the company wants to be completely capital agnostic, meaning that as it builds its client base and the portfolio held in the Natural Disaster Fund (NDF) grows, third-party investors and ILS fund managers could all allocate some capital to it in future, as way to access the returns of developing market insurance business.
As Global Parametrics scales up, the types of risk that it could bring to investors via the Natural Disaster Fund (NDF) could prove extremely attractive to investors already in the ILS space. These parametric, developing and emerging market weather and catastrophe risks would offer a unique opportunity for accessing diversifying risks, or new perils, something the ILS market is currently only beginning to see in very small volumes.
The Natural Disaster Fund (NDF) will sit between the capital and re/insurance markets and the buyers of protection, with Global Parametrics acting as a modelling, structuring and insurance provider, in this way smoothing and making more efficient the transfer of risks from developing market clients to the ultimate risk bearing insurance and reinsurance or capital and ILS markets.
By using a fund structure, which allows capital providers to participate and share in the risk adjusted returns, while Global Parametrics uses an efficient model as a type of modelling, structuring and insuring entity, the overall model could prove efficient, helping to lower the cost of risk capital and ultimately protection.
For investors in the Natural Disaster Fund (NDF) the business model will also enable them to get their capital significantly closer to sources of risk which would previously have been very difficult, or almost impossible to access.
By bundling or packaging risk into the fund structure, Global Parametrics can also take advantage of the diversifying nature of risks from across the developing markets of the world which as it scales will also increase its efficiency, ultimately helping to reduce the costs of natural disaster coverage it provides.
Global Parametrics and the Natural Disaster Fund (NDF) will look to work alongside NGOs and development organisations, to help protect against weather and disaster risks such as drought, to provide insurance protection for lenders, to help and support resiliency projects and also for hedging risks associated with renewable energy.
All of this will be undertaken on a global basis, ensuring the globally diversified Natural Disaster Fund (NDF) can in time pass on the benefits of diversification through the fund to Global Parametrics’ clients.
The ultimate goal and the reason the likes of DFID and KfW are backing Global Parametrics and the Natural Disaster Fund (NDF) is for poor and vulnerable people in developing countries to be able to rely on rapidly disbursed funding when disasters or severe weather events occur, providing continuity, just in time financing and even pre-event financing using triggers based on forecasts.
Global Parametrics is a fascinating initiative that answers many of the questions asked of re/insurance when it seeks to tap into developing markets. The business model, being agnostic as to form, capital and structure, has enabled something highly efficient to be created and structured, which in time should become a compelling source of disaster risk transfer and financing to support development, resilience and ultimately increase the insurance penetration of poorer regions of the world.
As a start-up venture, looking to bring efficient risk capital to areas of the world that third-party ILS capital has yet to meaningfully reach, Global Parametrics will need the time to demonstrate if their business model can provide the catalyst for spurring insurance markets as investments in low and middle-income countries as intended.