Axa's Tanguy Touffut on how Big Data is enabling parametric insurance

According to the World Meteorological Organization, 2016 was the hottest year on record. Climate change has also made weather patterns more extreme and unpredictable all around the globe. Already this year we have seen its effects with millions hit by droughts in East Africa, flooding displacing hundreds of thousands of people in South-East Asia and at the other end of the scale the French wine harvest is threatened after an exceptionally chilly April followed record highs in March.

The impact on individuals, industries and national governments can be devastating. For industries that are dependent on cyclical weather patterns such as agriculture, renewable energy and textiles, weather unpredictability can have a significant impact on productivity and profitability. All over the world, governments, universities and businesses are working on ways to mitigate the worst effects of extreme weather events.

When faced with catastrophes, we tend to look to the insurance industry to provide some sort of mitigation to the problem. However, one problem with insurance is it tends to be too slow in paying out. It can help you replace your car if it is stolen, but farmers who have lost their crops can’t wait until the next season to start all over again. They need to be paid as soon as their crops start to fail so they can save their livelihoods – and in some cases even feed their families.

Parametric insurance is not a new idea. Cover that pays out if certain variables occur – such as too little rain, or too high a temperature – was first trialled in the 2000s to deal with climate crises in Africa. In theory, it is a win-win solution. As it pays out when a farmer knows their crop is going to fail, it enables them to replant a more resilient crop. This is not only good for them, but also means that the crop producers sell more seed, the banks and governments don’t have to put up as much extra finance or aid, and the insurer pays out less because the farmer can mitigate their loss.

The challenge was a lack of data – for example, Ethiopia had less than 20 weather stations to record rainfall, heat or wind – and a lack of ability to process this data quickly enough to pay out. In the last few years, this has changed. Big Data, the ability to process vast amounts of variables quickly, has transformed multiple markets across the world with the added ingredient of satellite technology. Newer, more precise and more targeted satellites now give ultra-accurate real-time data not only for weather but also its impacts. Just as satellites show us the colour of the door of the house we are going to visit on Google Earth, they can now give us granular detail of how well crops are growing in an individual field in Africa or which particular villages are being flooded by typhoons in Asia.

This means the insurer has data that shows that a farmer in the Philippines, or a fisherman in Senegal, is being hit by extreme weather and can pay out straight away, without reams of claims management paperwork. Global bodies like the World Bank or the World Food Programme, national governments, agricultural banks and seed and fertiliser producers are all starting to include parametric insurance in their aid, loan and product offers. Insurers are also looking to bring costs down by selling to farmers and small businesses directly, for example working with mobile phone companies.

It is not only agriculture where parametric insurance is starting to take hold. Energy is also highly sensitive to climate change. In some regions, changing weather patterns can boost the development of the wind energy industry, while in others changes result in less wind. Researchers believe there is a chance that the strength of winds may decrease in some regions as global temperatures continue to increase. Analysis of trends using data can give wind farm companies greater insight so they can optimise their operations, both in terms of the ideal location for sites and the design of the turbines themselves.

There are similar examples from the textile industry where consumer behaviour has become increasingly difficult to predict and has a direct impact on revenues for textile manufacturers.

In fact, for hundreds of years, manufacturers and retailers have known changing weather can alter consumer buying patterns. If there has been an unseasonably cold summer, retailers aren’t going to sell as many cold fizzy beverages in beach towns. On the other hand, if it’s an unseasonably warm winter, knitwear and coat sales drop. The risks of being vulnerable to the changing tides of weather can be devastating for these types of industries. However, if your insurer pays out if temperatures drop at the start of summer, it allows you to save your business and adapt quickly to the change in demand.

Whether you are a wind farmer in China, a textile retailer in Nigeria or a wine grower in Bordeaux, you cannot control the weather but you are expected to be able to manage its financial consequences. The power of parametric insurance is that it combines the expertise of meteorologists, data scientists and insurance specialists to give you the means to do just that.