Using science to predict severe El Nino events

FRIDAY, JAN. 25: A Bermuda insurance services company will be using sea surface temperatures to predict severe El Nino events  months in advance of its impact on land.

Kalista Global has partnered with Bermuda-based New Grange Brokers to launch an innovative type of parametric index-based insurance weather product.

The new product is called “EPC”, or “ENSO-based Parametric Cover”, and functions by utilizing sea surface temperatures taken from the National Oceanic and Atmospheric Association as the basis for payout.

Sea surface temperatures are highly predictive and directly correlated with extreme El Nino events.

Extraordinary sea surface temperatures can signal severe El Nino events months in advance of its impact on land, which enables an insurance payment to be made several months before catastrophic weather occurs.

Payment

A press release from Kalista said: “This advance payment can then be used by the insured for risk mitigation and adaptation strategies to reduce losses and potential disruptions from the impending catastrophe.

“The insurance uses an index for payout that provides an objective means to measure losses, such as excess rain, high river levels, or extreme sea surface temperatures.

“By using an index as the proxy for loss this means that there is no need for expensive loss assessments.

“Utilizing an index also reduces moral hazard and other issues that can arise with traditional insurance covers. Because of the index structure, the product is extremely transparent for reinsurers, as the trigger is based on the ENSO (El Nino Southern Oscillation) cycle index, which covers El Nino, La Nina and normal sea surface conditions.

“It should be pointed out that these ENSO measurements were initially developed over 50 years ago by the National Oceanic and Atmospheric Administration and have been in use ever since.

“In addition, the product is extremely unique as it can trigger before a disaster actually happens, making it applicable for a wide range of uses including smoothing out commodity price volatility for natural gas and electricity, covering Loss of Production Income for wind turbine farms (onshore / offshore) or agriculture risk.”

Benefits

Spencer Conway, executive vice president of Kalista said:  “This product greatly benefits protection buyers by providing advance payments that allow them to better manage and prepare for an El Nino event, as well as the immediate consequences of a severe catastrophe.

“This is a transparent and easy to understand product offering that is highly complementary to existing hurricane covers, and should therefore be extremely desirable to re/insurers.”

“In October of 2012 we announced the launch of our Parametric Catastrophe Solutions, designed to assist with exposures previously considered difficult to underwrite or uninsurable.

“With “EPC”, utilizing our in-house structuring expertise we have crafted a product designed to meet specific, targeted needs of protection for buyers whilst at the same time being attractive to re/insurers.”

Hugh O’Donnell of Bermuda-based New Grange Brokers said in a press release: “This product exemplifies the clear-thinking, unique processes that Kalista creates and, as such, New Grange is proud to be a part of.”