Analytics

Betting on the Weather

Parametric weather products offer event organizers improved protection of revenues in an increasingly unpredictable climate.
By: | September 14, 2016 • 5 min read

Apart from an attendee dying, rain is perhaps the worst thing that can happen to a festival,” said Christian Phillips, contingency underwriter at Beazley. “An angry few hours from Mother Nature can cost hundreds of thousands of dollars, dampening profits even for sold-out festivals and negatively affecting on-the-ground consumer spending.”

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Christian Phillips, contingency underwriter, Beazley

Yet according the insurance industry, many event and hospitality companies continue to find themselves inadequately covered against losses that could arise from adverse weather, or are unaware of the insurance coverage options available to them.

“A protection gap exists on weather coverage for events companies,” said Tanguy Touffut, global head of parametric solutions at AXA, who believes those buying coverage are in the minority.

“However, increasing weather anomalies as a consequence of climate change, as well as the emergence of innovative insurance solutions such as parametric insurance, are fueling increased demand for such covers from events companies.”

Typically, event organizers must choose between event cancellation coverage — a broad policy that compensates the insured if their event is cancelled for a multitude of reasons beyond their control — or a parametric weather policy that pays an agreed sum if a certain weather trigger is hit, for example, half an inch of rain over four hours.

While the weather policy won’t cover against the wide range of perils the cancellation policy would (such as fire, terrorism or road blockages), it does cover against the lost income from attendees leaving a weather-affected event early. But that kind of loss wouldn’t be covered under a cancellation policy because the event must be cancelled to trigger a payout.

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“This presents companies with a tough choice. They usually don’t have the budget for both policies, and weather can be a little more expensive as it is a stated value policy.

“If the client picks the wrong coverage and loses money, they will be upset,” said Marlene Benoit, promotions and events leader for broker Lockton.

Beazley has gone some way to bridge the gap with a new product that is a hybrid of both types of coverage. As well as offering broad cancellation cover, the product also establishes a weather trigger on which it will pay a fixed sum to compensate for lost revenue.

Benoit said she believed other insurers may soon introduce similar products.

“When the industry comes up with something unique in the marketplace, others will follow, particularly when it is well-received and there is demand.”

Number Crunching

Weather observation techniques and data gathering has improved markedly in recent decades, and insurers now have a data bank of at least 30 years of high-quality data as a base for their underwriting.

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Tanguy Touffut, global head of parametric solutions, AXA

“Additionally, the capacity to process these data has improved tremendously, which gives us very sophisticated indexes that better reflect the clients’ risk,” said Touffut.

However, gaps in coverage remain.

“We allow the insured to choose a threshold amount of rain at the front end of the policy. However, we can’t cover every eventuality,” said Phillips.

“If they insure against half an inch of rain but it rains 0.49 inches and people still leave their event, there will be a gap in cover.”

“Due to budgeting, companies may choose a threshold that is too high, and when they have a weather claim, it doesn’t hit the trigger mark, so they end up paying for a policy that doesn’t pay out,” said Benoit.

Consumer Data

Indeed, while improved climate data makes weather parametrics relatively reliable, attendee spending behavior is harder to predict.

“We try to bring our knowledge of what we’ve seen in the past to give guidance, but it is still subjective,” admitted Phillips.

If more than one-third of an inch of rain falls, some attendees will normally leave an event, Phillips said, particularly if the rain falls persistently over several hours rather than in a short, sharp downpour. Clients typically stand to lose around 20 percent of their projected revenues from weather-related departures, though this figure could vary depending on the nature of the crowd, he added.

Combining weather data with Big Data on consumer spending habits to model the effect weather has on behavior at events seems an obvious next step to enhance the insurance offering.

Insureds can improve their chances of securing appropriate coverage by delving deep into their own revenue histories. “We ask the client for historical cancellation and revenue data over the longest period possible,” said Touffut.

Combining weather data with Big Data on consumer spending habits to model the effect weather has on behavior at events seems an obvious next step to enhance the insurance offering. However, James Ingham, head of renewables at risk analytics specialist Sciemus, said that in an age when “data is king,” it may be hard to get data providers to collaborate.

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“It can be done, but you would need a large provider like Google Public, for example, to host data covering multiple events across multiple demographics and geographies over a number of years in order to give event organizers full confidence in the inferences. You would also need a secure neutral environment to encourage Big Data providers from other areas such as credit card providers to also collaborate,” he said.

Touffut added that as the quality and amount of data and Big Data processing methods continue to improve, “indexes will become more precise and the models used to design parametric insurance products will even more accurately reflect the clients’ risk.”

“Furthermore, as parametric insurance fixes most of the ‘pain points’ of traditional insurance, both from the claims view and from the purchasing view, we expect this type of insurance to greatly propagate and eventually cannibalize some forms of traditional insurance,” he said.

But as Phillips pointed out, it is often only after an events company suffers a damaging loss that they will consider seeking cover. “Someone may have run an event for 30 years and never had a problem, but weather is changing. Companies can’t afford to rest on past weather patterns.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

 One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.”Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]