The weather risk market continues to expand and remains competitive for a sector with few experienced dealers, but for future growth potential to be realised, brokers have a key role to play, according to Martin Malinow, President of Sompo Global Weather, a division of Sompo International Holdings Ltd.
Reinsurance News recently discussed the healthy and expanding weather risk market with Malinow of Sompo Global Weather, an underwriter of bespoke weather-driven risk management solutions.
The weather risk market has been around for twenty years, and Malinow explained that it remains healthy, is expanding, and is still competitive.
“Weather protection is quite competitive for a market with only a handful of experienced dealers, with the pricing environment largely mirroring the strong rate declines seen in the broader re/insurance markets over the past decade.
“There has been a great deal of interest in weather protection from re/insurers and capital market investors given the low correlation of its returns to the more traditional re/insurance markets. This could be a function of the narrow focus on hedging energy demand that characterized weather’s first twenty years as utility demand for protection against warmer winters and cooler summers typically runs counter to insurance claims arising from extreme seasons.
“However, as the market expands to attract buyers in new verticals, the initial low correlation enjoyed by reinsurers will give way to more “clash risk” as parametric weather solutions will likely compliment or replace traditional insurance products with similar risks. For example, while a parametric hurricane product will pay faster than a traditional product, the entire program is directionally consistent. Likewise, parametric drought protection typically correlates with indemnity crop insurance. Given the likely accretion, I would expect parametric products in these verticals to be priced similar to traditional insurance products in terms of returns,” said Malinow.
Opportunities do exist in the weather risk market, most notably in the energy space but also in areas such as construction, agriculture, and also real estate/hospitality, explained Malinow. However, for future growth to be realised, he underlined the importance of the broker and specifically more distribution avenues.
“The key to future market growth is increasing distribution channels to connect the new and latent buyers to the small group of skilled providers. While in the more traditional re/insurance market, distribution is typically through a broker network, broker interest in weather risk has been largely non-existent. Given this, providers and clients in the market’s main vertical – energy – have formed close bonds and now transact directly, leaving no real value for the brokers to add.
“That said, there is strong opportunity for brokers to add value in the growth of the construction, agriculture, and real estate/hospitality verticals. Within these industries, weather businesses could benefit from the client and broker relationships of their parent companies who sell other insurance products to these same clients,” said Malinow.
Looking forward, Malinow said that current weather risk market leadership, which rests mostly with reinsurers, is to change. Adding that the future lies with large, integrated, global insurers who are able to access traditional reinsurance as well as third-party capital, and that also have the connectivity to increase the efficiency of the buying and claims process, while at the same time reducing friction and minimising costs.