Despite representing only a small portion of the total Property & Casualty market, parametric insurance has evolved rapidly in the last decade. This relatively new approach to insurance is index-based. At AXA, we believe that parametric insurance will continue to flourish in the future.

Despite representing only a small portion of the total Property & Casualty market, parametric insurance has evolved rapidly in the last decade. This relatively new approach to insurance is index-based. For instance, in some geographies, claims could be paid out based on actual meteorological conditions measured by weather stations or satellites. At AXA, we believe that parametric insurance will continue to flourish in the future.

It Knows No Borders
Originally, parametric insurance was limited to developing countries as it was considered the most cost-effective insurance model. However, technological advancements have led it to become relevant and effective in countries throughout the globe, slowly but surely making it a credible insurance option for losses previously considered non-insurable. Continuous technological progress in weather information indicators, most notably the upsurge of “Big Data” through weather stations and satellite imagery is making data much more specific, abundant, and ubiquitous. Satellite imagery provides information on a number of key indicators including climate parameters, ocean parameters, and land parameters, allowing for increasingly limitless applications. One telling example is the use of vegetation data based on evapotranspiration and the absorption of sun rays by plants as a proxy for proper plant development.

At AXA, we are convinced of the importance and relevance of parametric insurance for all types of industries, from retail to energy, and many more in between. Three out of four companies are sensitive to the weather, meaning their performance is impacted by such fluctuations. Weather variances can cause drastic drops in demand or substantial increases in costs, directly impacting companies’ bottom lines. Although no one denies the impact of natural disasters, many overlook the not-so-severe: unusually heavy rainfall in the spring, exceptionally warm weather in the winter, amongst others. It is a proven fact that these weather anomalies have become more and more common, and that they are affecting different industries on all levels throughout the world.

It Takes Two to Tango
We see a promising future for parametric insurance in developing countries but also beyond as a solution to protect the vulnerable from unpredictable weather patterns destroying their assets. Accordingly, in emerging markets, our parametric insurance team is focusing on agriculture and making it a strategic priority to work hand-in-hand with international institutions to provide index-based covers to the risk-prone. As a complement to the proficient micro-insurance programs already in place in emerging markets, we aim to tackle the issue at the “meso-level” and provide tailor-made solutions. Using this “meso-level” approach means that we do not need to look at clients’ personal circumstances to price the risk, but rather cover an organization in charge of redistributing payouts to farmers (a bank, a farmer’s co-op, a government, etc). In this way, we are able to reduce distribution cost curves by leveraging existing networks.

Our commitment is to keep investing in and exploring the newest weather and other data sources, including vegetation, air quality, and wave height, and to keep searching for the most innovative applications of parametric insurance. In January 2014, AXA opened its “Data Innovation Lab”, a research and expertise center that bolsters technological opportunities and develops capabilities for processing “Big Data,” which we believe to be the future of parametric insurance. As well, our presence and growing experience in many countries in Africa and Latin America is strongly contributing to the progress we are making with parametric insurance, and our partnerships with international institutions, local insurers, farmer co-ops, and governments is what is going to make a real impact. Recently, AXA partnered with the private investment arm of the World Bank Group to boost insurance coverage and capacity and improve safety in emerging markets - one of the most extensive public-private ventures of its kind.

Here to stay
As it is based on natural occurrences beyond human control, parametric insurance is a way of avoiding problems linked to moral hazard and adverse selection which in turn greatly decreases the cost of insurance. The applications of parametric insurance are manifold as it is crucial to industries beyond agriculture, from tourism to construction, and even health. We feel the best solution will be to join forces to further ramp up parametric insurance worldwide as it is vital and a key answer to tackling the many challenges that are and will continue to emerge with climate change.

- Tanguy Touffut
Head of Parametric Insurance - AXA Corporate Solutions