How Descartes Underwriting Helps Companies Weather Climate Change

September 10, 2020

Parametric insurance pays out when a pre-defined event occurs as measured by a specified figure, figures, or index. It has traditionally been used in agriculture and by insurance companies to cover natural catastrophes, including hurricanes, cyclones, and earthquakes (think CAT bonds). 

Parametric insurance has obvious advantages during a pandemic when agents and adjusters can’t travel, but insurers are under heightened pressure to continue to do business, to write new policies, and to settle claims expeditiously. With parametric insurance, claims are settled automatically based on data, and payments made quickly at a time when liquidity may be critical to a business’s survival because losses can be detected in near-real time.

Parametric insurance seems well positioned to meet the cover needs created by climate change, which require a forward-looking view of risk. As we know, traditional insurance underwriting is backwards looking. Risks related to climate change are very large and rapidly changing; many companies are exposed but self-insure without thinking.

Descartes Underwriting was founded in 2018 on the belief that the greater use of parametric insurance will make businesses more resilient in the face of climate change. Descartes Underwriting relies on its weather risk modelling expertise and new data sources — including IoT data and satellite imagery — to design bespoke and innovative insurance covers. 

In May, Descartes and Generali announced a strategic partnership, combining Generali’s corporate sector reach and local market knowledge with Descartes’ parametric expertise. The Italian insurance giant has said it believes parametric insurance has promising growth potential and that the partnership will allow it to better serve corporate and commercial clients across the globe.

Descartes has 20 employees and is based in Paris. It functions as a Managing General Agency (MGA) and underwrites parametric insurance policies on behalf of insurance carriers, reinsurance companies, and insurance-linked securities (ILS) funds. It has the capacity to underwrite €75 million per deal and operate globally.

The firm raised a €2 million seed round from BlackFin Capital Partners in February of 2019 and just 18 months later, in September of 2020, an $18.5 million Series A from Cathay Innovation and Serena, with continued participation from BlackFin. Tanguy Touffut is co-founder and CEO.

Q.  Tanguy, how big is the market for parametric insurance currently and how big can it become?

A.  The parametric market is currently more than $10 billion worldwide but across many sectors (agriculture, energy, transportation, etc.) and all clients segments (from governments and corporations to individuals).

It will become much larger in the next 10 years for three main reasons:

1. The traditional insurance approach is not fit for purpose: 
   • claims payment can take months or even years, usually after legal battles,
   • premiums tend to be expensive,
   • contracts lack transparency, 
   • while to the contrary, through new technologies, parametric insurance can offer a better value for money and an improved customer experience.
2. Climate change has increased the vulnerability of populations and economies, and innovative insurance solutions are becoming a must to mitigate its impact.
3. New technologies and new data sources are enlarging the scope of parametric insurance: it was first focused on agriculture (drought) and energy (temperature) but many more perils are now covered, from hurricanes and storm surges to hailstorms, low river levels, and non-damage business interruption.

For the retail segment, there is also a good match between parametric insurance and API-based distribution.

All in all, I expect parametric insurance to represent more than 10-15% of the corporate market in the next 10 years. The current discussion on pandemic insurance in Europe is a good example: most government proposals are now considering parametric triggers to ensure a swift claim payment.

Q.  Is growing recognition of the risks posed by climate change behind increasing interest in parametric risk transfer?

A.  There is definitely a growing awareness about climate change and its many consequences. There have been a number of recent events – for example, wildfires in California and Australia, heat waves and cold spells in Europe and the US — that are illustrating the current increase in the frequency of weather anomalies. 

Risk managers are looking for solutions to better protect the revenues and profits of their company in the face of climate change and a parametric risk transfer is probably the best solution. There is a very good match between climate-based risks and parametric covers. This includes natural catastrophes — hurricanes, floods, typhoons in Asia, and tornadoes — which are something we are addressing in the US right now for our European clients. 

Q.  Why else is interest in parametric insurance growing?

Fast claims payment is something that is very appealing to risk managers, but beyond that, parametric insurance is a better fit for some kinds of risks. 

Today, corporations have often to wait for 18 months or longer for claims payment following a loss. You tend to send your lawyers first when you have a claim and there is a legal battle, which can take ages. Take wildfires in the US as an example. The PG&E case is moving rather quickly, but it can take as long as 10 years to clarify the exact claims payment for a specific catastrophe. In our case, we tend to pay withing five working days, which makes a big difference.

It’s also more affordable, in the sense that you reduce claims-handling costs. Depending on the line of business, the geography, and the segment — are we talking about a large corporation or a small farmer? — you save a lot of money through lower claims-handling costs. It’s quite significant. It can be more than 30% of the total premium.

Transparency is a big topic in insurance. It has been reinforced by the COVID-19 crisis. In Europe, most businesses were actually covered against epidemics but not for pandemics. Maybe for you it’s clear but for many clients the distinction between an epidemic and a pandemic is not straightforward. 

So there is a need for clarity and transparency in insurance contracts. In our contracts, we generally need only one sheet to describe the product. The rest consists of the standard conditions that exist in all insurance contracts, which are sometimes compulsory, but our contracts are much shorter in terms of wording.

Q.  Why do you say you’re focusing on resilience rather than protection?

A.  Resilience goes beyond protection: resilience is initially the act of rebounding quickly from adversity, but its meaning has evolved, and it also describes the capacity not to be discouraged and to fight back. In physics, it can be used to describe the elasticity of an object. Insurance alone cannot stop climate change, but we can work hard to support companies and governments in mitigating the risks and planning for the future.

Q.  Parametric insurance isn’t new. What is happening in technology and data that is accelerating innovation in parametric insurance and why did it require InsurTechs to deliver it, rather than incumbent carriers?

A.  First, barriers to entry have disappeared: thanks to new processing capabilities, cloud computing and data sources. You do not need to have your own historical data to price natural risks. Fifteen years ago, incumbents were clearly in a commanding position in the industry. Now, thanks to satellite imagery and IoT, new players with superior quantitative and coding skills can be better positioned to meet broker and client requests. More than 2.5 quintillion bytes of data are produced by humans every day and 90% of the data in the world was generated over the last two years alone.

Second, having no legacy and the capacity to attract high-performing profiles not fit for large and hierarchical organizations can make a difference. Not all gifted millennials are willing to work in such companies.

Lastly, InsurTechs are willing to take more risks to disrupt their markets: contrary to incumbent carriers, they have nothing to lose and everything to gain.

Q.  Why was the managing general agent (MGA) model the best way to take advantage of this opportunity?

A.  Partnerships between large established players and more nimble organizations like start-ups can lead to very successful innovative solutions. MGAs are a way to combine the best of both worlds.

Q.  Why do you distribute solely through brokers?

A.  Brokers are key to educating the market. They know their customers, their expectations, their budget and constraints. They are looking for affordable covers and solutions to their existing problems. They are our best advocates and allies.

Q.  Do most brokers understand (or even know about) parametric insurance? Have you had to undertake an education effort to make parametric insurance top-of-mind for brokers?

A.  Today, only the most sophisticated brokers know about parametric insurance. However, there is a growing awareness fueled by the current hardening cycle. Corporations are under pressure to reduce their insurance budgets while insurers and reinsurers are trying hard to increase rates and rebuild their margins. In this context, parametric insurance is a growing alternative: clients only pay for the cover they value and at a competitive price.

Q.  What about risk managers? Are they aware of the availability of parametric policies?

A.  Yes, risk managers in many geographies are becoming aware of the availability of such policies. Associations of risk managers in several countries have promoted training session about this topic over the last 5 years. They perceive the benefits of a fast and simplified claim process and the flexibility of parametric solutions to adjust the limit, the deductibles and the trigger to their budgets and risk appetites.

Q.  Can parametric insurance replace traditional cover, or does it always need to be complementary?

A.  Today, parametric covers are sold both as a replacement or complementary to a traditional cover. For instance, property damage can be covered in a traditional way and business interruption covered through a parametric product. However, we observe more and more replacements in the market as the new parametric products tend to have a lower basis risk.

Q.  How do business owners select the correct sum for payout (avoiding basis risk — the risk that the payout will not cover losses) when the potential loss is something they may have never encountered before?

A. This is not an issue specific to parametric insurance but to insurance in general. Take COVID-19 as an example, most business owners and their reinsurers had not imagined the potential loss related to such a pandemic and the vast majority of them were not covered. That being said, designing a parametric cover does require some back-and-forth with our brokers to make sure that the product is just perfect and fits with the client budget and risk appetite

Q.  How can a risk manager, new to parametric cover, be certain that the right parameters have been chosen?

A.  Again, the role of brokers is crucial to helping risk managers select the most appropriate covers. Then, a good test is to look at the “theoretical” historical payouts over the last century to see if they were sufficient. This is a way to calibrate properly the cover. 

Q.  How large can these policies get, and how small? Is parametric insurance practical at this point for small businesses?

A.  Today, the largest premiums could be above $10 million while, in the affinity world, some premiums could be lower than $1. Parametric insurance is fitted for all segments: from jumbos to individuals.

There are a number of startups focused on SMEs in the US, typically for earthquakes in California and hurricanes in Florida, usually targeting businesses that are not covered already. There are a number of American brokers distributing such contracts, not only the largest players. 

Parametric covers for the small business segment are usually quite simple. Typically, it covers business interruption or costs related to evacuation of your office or factory. For instance, if the eye of a hurricane passes withing 30 kilometers of your location, then there’s a payout, and usually the payout will depend on the intensity of the storm: for instance 25% of the limit for a Category 1 storm, 50% for Category 2, and 100% for Category 3 and above, each time tailored to the client’s exposure and needs. The NOAA shares the windspeed of the hurricane, and you can track the path of the storm in real time. Payout is triggered in real-time if local regulation allows.

Q.  Is capacity an issue for parametric insurance?

A.  Capacity is never an issue if the price is fair. We can already offer EUR 75M capacity per contract and can increase this number if required. Generali Global Corporate & Commercial is our natural partner, but we can also work with other risk carriers and ILS funds when more reinsurance capacity is needed or when the risk underwritten exceeds our mandate. 

There are different sources of capital in the corporate segment: insurers, reinsurers, but also the financial markets. Asset managers are looking to reduce their beta, basically to reduce the correlation of their portfolios with the stock market. Typically, earthquakes in Japan, floods in Italy, or droughts in Africa have no impact on the performance of the Nasdaq. There is a strong decorrelation between corporate insurance, the different catastrophes that can occur, and the stock markets. For the insurance-linked securities fund, the corporate segment is a way to get diversification and of course to secure comfortable margins. So they are deploying capital in the corporate segment. It was close to zero fifteen years ago, and now the total capacity is above $100 billion. It’s a massive new player in the reinsurance market, and we are witnessing the rise of many ILS funds. You can have a look at the artemis.bm website where they list most of the largest ILS funds. Such players are competing against the existing reinsurers — against the big names, like SwissRe, HanoverRe, and all the others. 

Q.  Which new or emerging risks do you expect to underwrite cover for next?

A.  Parametric insurance is fit for purpose for a number of emerging risks: cyber, terrorism, pandemic… However, designing the right products and securing enough reinsurance capacity will take time. We are currently enlarging our offering to better cover floods, hail, and storm surges.

Q.  Has there been an interest in business interruption insurance, particularly non-damage business interruption insurance, as a result of COVID-19?

A.  Of course, many companies are looking for NDBI covers as a result of COVID-19. However, it is hard for insurers to insure “burning platforms”. Insureds should be covered prior to an event. We all need to work now to prepare the right products for the next sanitary crisis.

Q.  How common is it to have a payout from parametric insurance when there’s actually been no loss?

A.  If the product is well designed, it should never happen. In some geographies, a proof of loss will be required.

Q.  What is Descartes’ role in cyclone insurance offered by the Pacific Catastrophe Risk Insurance Company?

A. Through our partner Generali Global Corporate & Commercial, we are providing risk capacity to the pool. A significant claim payment was recently made following Cyclone Harold and it really helped local governments to cope with this catastrophe. We are proud to be one of their partners and to support the resilience of several Pacific Islands.

Q.  In addition to agriculture and energy, which industries are expressing interest in parametric insurance?

A.  All sectors can be impacted by natural perils. Earthquake, cyclone, flood, wildfire, storm surge, frost etc. can harm all types of companies. Nobody is immune. That being said, we observe an increasing take-up rate among transportation, hospitality, construction, and timber companies.

Q.  What can you tell me about the datasets you are using? Are they all public, or are some private? Are there regional differences in the availability of some data sets?

A.  That’s definitely our secret sauce: there are many different datasets you can use for pricing and claim payment. Some data sources are public but there are more and more private data providers trying to make profit out of the Internet of Things. For satellite imagery, the reach can be global. For IoT, the installation may be more or less complex depending on the local regulation.

Q.  How is AI changing risk modeling?

A.  In the corporate segment, the whole paradigm is changing. Underwriting was initially based on expert-judgement and on-site analyses. Now, sophisticated algorithms analyzing complex datasets can better perform than the best experts. Of course, not all lines of business and types of risks can benefit from AI and we are just at the beginning of a long journey

Q.  Are you utilizing smart contracts? Some insurers are trying to avoid paying up due to COVID-19. Will smart contracts and parametric insurance solve this problem in the future?

A.  We would only use smart contracts when there is an obvious added value for our clients. The potential of distributed ledger technology is larger when there are a large number of claims or paid to many clients. However, we believe in the benefits of this approach. Smart insurance contracts require a parametric approach: if there is no simple rule such as “if X happens, then Y is paid”, this is impossible to trigger a smart contract

Q.  How does Descartes get paid?

A.  Descartes acts an MGA and receives commissions from its risk carriers.

Q.  Are the costs of providing parametric insurance lower than those of providing traditional indemnity insurance?

A.  Parametric insurance tends to be much more affordable than traditional insurance. The reason is simple: depending on the line of business and the geography, claim handling costs represent up to 30% of the premium. Through parametric insurance, there is no cost allocated to claim handling as the payout depends on a threshold which is met.

In addition, parametric covers are bespoke: it is easy to adjust parameters to design a cover that would meet a client’s budget.

Q.  Do you retain any of the risks you underwrite?

A.  At this stage, 100% of the risk is ceded. 

Q. How is the Paris ecosystem for an InsurTech startup?

A.  The French FinTech and InsurTech ecosystem is one of the most dynamic in Europe. Start-ups are becoming more attractive for young engineers and business developers. Over the last years, the government has improved the economics of start-ups through both tax incentives and subsidies. European and International VC funds are also more interested in French startups. 

Even more start-ups are expected to be launched in France despite COVID-19 and the uncertainty related to the worst economic crisis since the Great Depression.

Q.  You were incubated at Le Swave. What was your experience there and do you recommend it to other FinTech / InsurTech startups? 

A.  Le Swave is a great place to be incubated. Being surrounded by entrepreneurs and entrepreneur-friendly people makes our life easier. They also provide experts across several fields of expertise: from search engine optimization to legal advices.

Q.  Why did you choose BlackFin, Cathay Innovation, and Serena as your investors?

A.  We are proud to work with Cathay Innovation and Serena, both of which have incredible track records, an entrepreneurship mindset and are the perfect match to support our global development. BlackFin is one the leading FinTech investors in Europe and their founders have a great track record of building successful companies. 

Q.  What has been the impact of COVID-19 on the way you are working?

A.  The team members were used to travelling a lot or to working from home. As a result, we did not face any disruption and some team members did even enjoy the lockdown period as they could spend more time with family. What has been challenging was to create “remotely” a strong corporate culture in a fast-growing start-up. For new joiners or foreigners, the office is still a crucial place to socialize. Some of us prefer to come to the office, some others prefer to work from home. In the end, we respect everyone’s preference.

Q.  What does the Descartes team look like?

A. The team is mainly made of bright engineers, PhDs and data scientists but from all over the world. We have eight nationalities on the team today and we expect more than 10 by the end of the year.

We also share common values and a willingness to innovate in the face of climate change.

Q.  How do you plan to use the money you just raised?

A.  We plan first to start hubs in the US and in Asia – first New York and then Singapore. At some point in time, we will open other hubs. LatAm and maybe also in Miami: it’s a big insurance hub for Latin America.

At this time, we are quite ambitious about the US market. Of course, it’s the largest market by far, and it’s a market where we think insurers tend to be quite conservative. There are some innovations but — compared to China or other markets — it’s quite conservative, whereas the risk managers are looking for new solutions. We think there is a mismatch between the current offerings in the US and what risk managers are looking for. So it’s a good market environment for startups. We definitely want to be there.

Q.  Are you hiring?

A.  Yes, in three key geographies: Paris, New York, and Singapore. We aim to recruit +30 people in the next 12 months: mainly engineers and data scientists as well as business developers with some knowledge of insurance or a willingness to learn about insurance for the corporate segment. We are really focusing on the corporations. Usually, our clients have revenues above $100 million.

People don’t need to speak French to join the team. I would say 40% of the current team does not speak a word of it. If you are interested, you can send a resume to jobs@descartesunderwriting.com.

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