Weather risk market healthy & expanding: Malinow, Sompo Global Weather

Opportunities remain in the healthy and expanding weather risk market with both capacity supply and demand supporting short-term growth. And, at the same time, there’s likely to be a shift in weather market leadership away from “reinsurers with a front end”, according to Martin Malinow, President, Sompo Global Weather.

Sompo Global Weather, part of Sompo International Holdings Ltd., underwrites tailored weather-driven risk management solutions, working with corporations and municipalities that are looking to reduce their financial exposure to weather.

In an interview with Artemis, Sompo Global Weather’s Malinow explained that the weather risk market is healthy and expanding along every metric the firm measures.

“We are seeing evolution away from a single vertical market – energy, specifically global utilities – to a multi-vertical market, with companies in construction, agriculture and real estate/hospitality, responsible for the majority of non-energy demand. Further, requests are not confined to any one region or continent, but are truly global in nature, and are providing opportunities outside the traditionally more active regions of the U.S., Western Europe and Australia, including Central and South America, Eastern Europe, Africa, and South and East Asia.

“The reason for this matrix growth across verticals and regions is not due to a paradigm shift in risk management or the regulatory landscape, but instead a result of the natural diffusion process associated with any new financial product like weather protection,” said Malinow.

He continued to explain that it’s easy to forget that the market has only been around for two decades. The market’s early growth projections were overly aggressive, he explained, both in terms of scale and uptake, but clients have now gained the required comfort with the product based on impressive efforts and hard work of market players.

“I think the old adage applies here, “overnight success takes about fifteen or twenty years,” he said.

Currently, the best opportunities in the market are still in the energy space, but this has evolved to encompass a broader focus beyond the global utility business, to include solving the challenges associated with renewable assets in a traditional thermal generation portfolio.

“This has been manifesting in demand for long-term ­in many cases up to 10 years ­ volumetric and revenue protection to make new projects more “bankable” as well as short-term products – under one year in tenor and with multiple triggers – to financially protect higher-order interactions between temperature-driven energy demand, renewable- and thermal driven energy supply and spot/forward price volatility,” said Malinow.

He continued to note that other opportunities do exist in areas such as construction, agriculture and also real estate and hospitality. With construction and agriculture, weather liabilities are embedded across the value chain, it’s just that the weather risk market has collectively not yet found an efficient mechanism to address.

“This is changing rapidly though as new products and programs – supported by technology – have enabled risk transfer to begin. The big question in my mind is how quickly this process can evolve so we get to a phase of the market where clients in these verticals are as comfortable with weather products as are clients in the energy industry, where products are now being “bought” and no longer need to be “sold”.

“And while there is ample capacity on the provider side to handle current demand as well as near-term growth, there are a limited number of players with the expertise to deliver meaningful client solutions so we have the opportunity to be involved in many of the transaction opportunities in the market. In all of the above verticals, Sompo Global Weather is focusing more on programs where we can provide the products, capacity, analytics and speed in both pricing and claims settlements that program buyers require,” said Malinow.

Sompo International also owns Blue Capital Management, which runs two stock exchange listed ILS and collateralized reinsurance investment strategies. Malinow told Artemis that Sompo Weather and Blue Capital have worked very closely on a number of products, most notably Hawkeye, the first weather sidecar, which was launched to take advantage of strong demand and strong pricing for warm winter protection in Europe.

“Together with Blue Capital, we continue to field strong interest from capital market investors looking for exposure to parametric weather protection and have several products in development,” said Malinow.

To conclude, Malinow offered some thoughts on what the future might hold for the weather industry, and how Sompo Global Weather is positioning itself to remain a market leader.

“While the lines between insurance and reinsurance, and ILS funds for that matter, have blurred over the past few years through M&A, current weather market leadership still rests largely with reinsurers. This will likely change.

“The value differentiator for parametric weather protection going forward will not rest in the ability of reinsurers to simply provide derivative capacity – which is frankly a commodity in our market – but in the ability to embed or wrap parametric weather protection into high-value insurance programs. This further requires a global distribution platform that hinges not only on the ability to understand, price and sell the protection but also on the ability to deliver this protection to clients around the world written on local insurance paper.

“Unlike the current market where leadership rests with “reinsurers with a front end”, the future lies with large, integrated, global insurers who can access traditional reinsurance as well as third-party capital and have the connectivity to speed up the buying and claims process, minimize friction and lower costs.

“We believe that as part of Sompo, we have one of the strongest global platforms in the market in terms of insurance expertise, technology, licensing and balance sheet strength which positions us well in addressing the challenges and seizing the opportunities of the future,” said Malinow.