Nephila Capital uses Lloyd’s syndicate for ARC reinsurance renewal

Nephila Capital has participated as a reinsurance capacity provider for the African Risk Capacity (ARC), underwriting its first parametric weather risk transfer contract to cover African drought risks through its Lloyd’s of London Syndicate 2357.

Nephila Capital is the world’s largest investment manager dedicated to reinsurance linked investments in natural catastrophe and weather risk, managing roughly $9.5 billion of third-party capital at the last check.

The firm has always specialised in underwriting weather risks, but this year sees it participate in the ARC reinsurance renewal for the first time, enabling Nephila to access a diversifying risk in Africa, a region where its capacity is more rarely put to work.

Nephila announced today that it has agreed to provide drought protection to farmers across the ARC covered countries in Africa, to help transfer the risk of dry weather impacting crop yields.

The transaction signals another first for Nephila’s Lloyd’s Syndicate 2357, being the first parametric weather risk transfer deal to use the syndicate capacity.

When the Lloyd’s syndicate launched, it only underwrote county-weighted industry loss warranties (ILW’s). More recently Nephila used the syndicate to provide indemnity reinsurance protection to the Florida Hurricane Catastrophe Fund (FHCF). Now the syndicate has added parametric weather risk transfer to its capabilities.

Nephila explained that an express part of its Syndicate 2357 business plan targets the creation of a weather risk transfer business within the Lloyd’s insurance and reinsurance market, a product which the market is not so well-known for.

Nephila joined the panel of risk and capacity providers that collectively provided $US 72.5 million of reinsurance coverage to the African Risk Capacity (ARC), to underwrite its sovereign drought insurance scheme.

Farmers in nine countries across Western and Eastern Africa will receive compensation from their respective country within days of contract expiry, if crop yields are low due to a lack of rain. The ARC drought reinsurance program is now in its second year and will last for twelve months through April 2016.

Nephila explained that the structure of the reinsurance program demonstrates the power of parametric weather risk transfer products, offering swift settlement and efficient transfer of funds to the underlying insured.

The contracts payout based on rainfall measured by the US National Oceanic and Atmospheric Administration and crop impacts estimated by the Food and Agriculture Organization of the United Nations. This enables unbiased and transparent measurements to be taken, after which ARC then uses the rainfall estimates to calculate payments, if triggered, to countries and their farmers.

ARC renewed its insurance program, adding five new African countries in April. At the time, ARC told Artemis that there had been participation from ILS fund managers for the first time, one of which it now transpires was Nephila.

“Nephila is proud to support the ARC in its drought risk management program, as the latest step in over fifteen years of providing weather risk transfer protection on behalf of our underlying investors,” the ILS manager explained.

Nephila has a long history of providing weather risk transfer products, alongside its catastrophe reinsurance products and investments, having launched its first dedicated weather fund in January 2005. Nephila invested and allocated capital to weather risk contracts prior to that.

“Working with Willis and the ARC, through Lloyd’s of London and alongside other capacity providers in this market, on such a transaction is another encouraging sign that the weather risk transfer market will continue to grow.

“A growing awareness that weather risk can be quantified and transferred, like other financial and insurance-related exposures, is a healthy development for the global economy and for society,” Nephila explained.

It’s encouraging to see the world’s largest ILS and catastrophe reinsurance linked investments manager participate in the ARC renewal this year. As those programs and other similar emerging market weather and catastrophe exposed programs the use of efficient ILS capital will benefit their ability to lower capital and reinsurance costs.

For Nephila and its investors, having access to reinsurance programs like ARC’s offers a true diversifying peril and a role in providing much-needed capacity to some of the world’s most vulnerable and weather exposed people. We’d expect to see Nephila Capital’s participation in these programs grow, as it’s role as a leading provider of risk capital for peak catastrophe and weather risks continues.