Bermuda based insurance and reinsurance services firm Kalista Global which has a focus on the insurance-linked securities, catastrophe bond, parametric re/insurance and alternative reinsurance sectors, has launched a new product offering which it is calling ENSO-based Parametric Cover (EPC for short). The parametric product utilises sea surface temperature readings to create an index which is used to determine trigger events.
Kalista Global has teamed up with Bermuda-based New Grange reinsurance brokers to market the product, with Kalista providing structuring and index creation services while New Grange provide the brokerage facilities. Kalista continues to demonstrate that it wants to bring innovative products using parametric techniques to the risk transfer market, and this ENSO hedging product should generate significant interest among insurers, reinsurers and possibly corporates looking to protect their bottom-lines from the impacts of severe El Niño or La Niña years.
ENSO or the El Niño Southern Oscillation, also referred to as El Niño and La Niña, is a climate pattern involving variations in the temperature of the surface of the tropical eastern Pacific Ocean. Warmer than normal temperatures are referred to as El Niño conditions and cooler referred to as La Niña. Both can have catastrophic impacts on certain regions of the world, ranging from severe flooding to drought and even higher incidence of Atlantic hurricanes or severe tornado seasons. As such there is a strong and growing scientific link between ENSO and weather catastrophes which can create significant insured and reinsured losses.
It’s now generally accepted that El Niño has important consequences for weather and climate patterns around the globe and the insurance and reinsurance industry are increasingly picking up the bill for weather catastrophes caused by the climate phenomena. Of particular interest to reinsurers are the links between El Niño / La Niña and hurricane or typhoon occurrence and severity, something which many studies show to be correlated.
According to its press release, Kalista Global has based its parametric insurance product on U.S. National Oceanic and Atmospheric Association sea surface measurement data and will use it to create parametric or index-based products whose payouts will be triggered by the NOAA measurements exceeding pre-defined index points.
The press release from Kalista explains that sea surface temperatures are highly predictive and directly correlated with the occurrence of severe El Niño events, making them usable as a trigger for an El Niño insurance product. Unusual sea surface temperatures can signal the onset of an El Niño event months in advance of the actual impact on land, meaning that an insurance payout can be made sometimes months in advance of the catastrophic conditions occur. This is unique and would allow those benefitting from the cover to receive payment in time to use it to help mitigate the potential losses that the coming ENSO might cause.
The product provides a transparent mechanism to transfer some risk or hedge against severe ENSO seasons, using a trigger which is based on measurement data developed over 50 years ago, according to the press release. The product could provide cover to insurers and reinsurers with portfolio exposures in ENSO affected regions of the world, or even to corporations with specific exposure to ENSO year weather conditions who may benefit from an additional cash boost from the payout. This product could provide an interesting addition to the weather risk management communities arsenal of hedging products as well as a meaningful source of re/insurance cover to those needing it.
Spencer Conway, Executive Vice President of Kalista Global, commented on the launch; “This product greatly benefits protection buyers by providing advance payments that allow them to better manage and prepare for an El Nino event, as well as the immediate consequences of a severe catastrophe. This is a transparent and easy to understand product offering that is highly complementary to existing hurricane covers, and should therefore be extremely desirable to re/insurers.”
This product is similar to one which was created as part of a microinsurance scheme in Peru by GlobalAgRisk Inc. We spoke to Spencer Conway of Kalista Global about this and he said that the Peruvian microinsurance project inspired the Kalista team into looking more deeply into how the ENSO measurement data could be used to create re/insurance products. The GlobalAgRisk product is designed to help facilitate the provision of insurance cover to the rural poor and Conway told us he saw an opportunity to use a similar structure to create commercially viable solutions for the global re/insurance market.
Conway told us that he could see various ways to deploy the ENSO data index within the reinsurance markets, either as a pure parametric source of disaster cover, or within instruments such as industry-loss warranties (ILWs) designed to provide more customised cover perhaps even dual-triggered, or as an activation trigger, alongside the cedents actual indemnity losses. He also told us that the covers could be geographically limited as well to further customise them and the ENSO index measurement could be used as an activation trigger for a product which paid out based on the actual weather conditions in a pre-defined area.
Conway said; “Our goal at Kalista is to come up with clever solutions to difficult problems, creating mechanisms by which insurance or reinsurance protection can begin to be thought of in different ways than your traditional markets approach. That said, we want our products to complement clients traditional covers as well and it’s important that they fit well within their overall risk management programs.”
Kalista also aims to target what it sees as a growing appetite for new, diversified deals and both traditional and new sources of underwriting capacity according to Conway; “Additionally with these deals we are looking to cater to the demand for new diversified perils we are seeing from ILS investors and the collateralized markets.”
The Peruvian example was specifically designed for use within microinsurance projects so it will be interesting to see whether Kalista can make a similar product work in the commercial re/insurance markets. The idea of creating methods (such as ILWs) to hedge the impacts of severe ENSO seasons, using actual measurements which are scientifically understood to be linked to the resulting catastrophe, alongside a verified indemnity loss might be extremely attractive to insurers and reinsurers we believe.
Conway continued; “In October of 2012 we announced the launch of our Parametric Catastrophe Solutions, designed to assist with exposures previously considered difficult to underwrite or uninsurable. With “EPC”, utilizing our in-house structuring expertise we have crafted a product designed to meet specific, targeted needs of protection buyers whilst at the same time being attractive to re/insurers.”
Hugh O’Donnell, of Bermuda-based New Grange Brokers who are providing brokerage facilities for the product, said; “This product exemplifies the clear-thinking, unique processes that Kalista creates and, as such, New Grange is proud to be a part of.”
Read our article from last year on Kalista’s launch of a range of parametric catastrophe re/insurance products.