Lloyd’s launches parametric policy with no named perils required

Lloyd’s has developed a new parametric insurance policy for the hotel industry with a trigger that does not require a named peril to have occurred, rather paying out based on a decline in revenues being recorded.

The first policy designed by the Lloyd’s insurance and reinsurance market’s new Product Innovation Facility, this parametric profit protection insurance for hotels has been created to provide broad coverage against any kind of revenue impacting loss event.

The Product Innovation Facility at Lloyd’s was launched in June this year with a mandate to accelerate the development of insurance and reinsurance products targeted at new and emerging risks. Backed by 24 Lloyd’s syndicates, the Facility has over £100 million of committed underwriting capacity at its disposal and a clear mandate to innovate.

In the case of this parametric policy, no named event qualifier is required and instead it will pay out for any event that impacts a hotel and creates a pre-defined gap between actual and expected profits.

An insured event is defined as “the difference between forecast and actual market trading data widely accepted by the hotel industry,” which means that “the need for named perils has been abolished” Lloyd’s explained.

The market said this exemplifies “the creativity and flexibility of the Lloyd’s market.”

Examples for the types of events that would be covered by this parametric product are given as terrorist attacks, with the attacks on Paris three years ago cited as having widely hit hotel revenues by 15% while high-end hotels reported declines of between 30% and 40%.

In addition the the Novichok nerve-agent incident in Salisbury UK is also cited as an event where hotels in the area could have benefited from this coverage.

At its core, parametric protection structured in this way is protecting against loss of profits and business interruption impacts to revenues, valuable coverage for any industry and much more widely applicable than to just the hotel sector.

Think tourist venues, theatres, stadiums, casinos, airports, shopping malls. Any location that relies on consistent footfall and business to meet its revenue forecasts can benefit from a parametric insurance product that pays out when an event occurs that results in customers staying away.

This is a volatility buffer for the business of running hotels and as such much more widely applicable than to a sole industry.

The reason this is being launched at one niche is likely down to the availability of trading data that is, in Lloyd’s words, “widely accepted.”

That data needs to be accepted by the underwriters as well, as a source of data that is reliable, independent and that will truly show up the impacts of events quickly and in such a way as to make payouts crystal clear with no ambiguity.

That’s also vital for the covered hoteliers as well, as they need to know that when something impactful happens they will get the payouts they expect to receive, else products such as this have a short shelf life.

Having no named peril qualifier at all in the trigger language is ambitious though, as the range of potential events that could cause a hotels revenues to dip dramatically is enormous. So many unforeseen events could occur that would trigger such a policy, if the trigger is just based on profits dipping a specified amount below forecast.

As long as the underwriters are ready to pay out for the unforeseen to cause them to have to pay out at some stage in the future that is fine, but they do need to be ready for this to happen, as unforeseen events will trigger these policies at some stage in the future.

It would be extremely interesting to know if there are any exclusions in these policies language as well. For example cyber attacks.

A hotels systems could go down after a cyber attack, damaging profits for a time, and if it lost customer data as well it could lose revenue through loss of business going forwards too. Would that trigger these policies?

It’s not clear whether these policies will cover absolutely anything at all that causes the gap to widen between forecast and actual trading performance, based on the widely accepted data source.

If it is coverage for absolutely anything that impacts a hotels revenues then this is a truly useful volatility buffer for that sector. But the cost of policies may put this coverage out of reach of many, we’d imagine.

In this case, after an insured event (a pre-defined difference between forecast and actual widely accepted market trading data) occurs, the parametric policy is triggered and pays out to protect hotel profitability.

As a result, the parametric policy can help hotels by reducing cash flow volatility and be used to negotiate contractual agreements, or to unlock contingent liability exposures for many parties in the hotel and hospitality sector, Lloyd’s says.

This new parametric hotel insurance policy is being led at Lloyd’s by Tokio Marine Kiln, with additional support from Product Innovation Facility members Chaucer, Munich Re Syndicate, Beazley, Faraday and Axis.

Tom Hoad, Head of Innovation at Tokio Marine Kiln and Chair of the Product Innovation Facility, commented, “Hotel owners and operators know all too well how unexpected events can suddenly impact trading. This new product will provide much-needed peace of mind for them to remove some of the volatility that their industry can experience through issues over which they have absolutely no control.”

Lloyd’s CEO, John Neal, also said, “Lloyd’s has a well-deserved reputation as the home of insurance innovation and I’m delighted to see the speed with which the new Product Innovation Facility, whose capacity has more than doubled in the past few months, is moving. Using the combined expertise, insights and entrepreneurial spirit of all those involved, we’re developing, incubating and launching exciting new products to meet the very real needs of today’s world.”

Marc Bentley, from InterContinental Hotels Group, further commented “It’s a credit to Tokio Marine Kiln, and the supporting members from the PIF, that new products are being developed to address specific risk financing challenges that are outside of traditional insurance products. In today’s competitive world the challenges we face are complicated and unique, and the agility of innovative risk financing solutions are key to support our business objectives.”

This product is both interesting and also, if it covers absolutely any event that dents revenues sufficiently, quite unique.

These parametric triggers, based on profit and revenues etc. have been done before, although to our knowledge for them to be successful they have always had an event definition qualifier in the trigger contract language (weather event, terrorism event, etc).

It will be really interesting to see how much uptake this product gets, as these kinds of parametric policies are hugely valuable to businesses if they are able to be priced competitively.

All any CFO wants for his business is something that can smooth out revenues when bad things happen. Parametric triggered policies such as this provide an ideal model for insurance that can deliver on that.

Also read: Risk managers & C-Suite lack understanding of parametric risk transfer.