How Can Parametric Insurance Help Public Entities Manage Extreme Heat Costs?

Welcome (00:00):

Welcome to the Alliant Specialty Podcast, your source for insights on emerging risks, market trends, and specialty insurance solutions.

Carleen Patterson (00:09):

Welcome back everyone to another episode of In the Public Eye. I know it's been a while and the insurance market has been doing some crazy things this morning. I'm very excited to welcome to the podcast Taylor Forst, who is one of our property brokers in the public sector practice. And we're going to talk a little bit about some of the creative solutions that we've been putting together for some of our clients. And before we jump into it, Taylor, please introduce yourself.

Taylor Forst (00:42):

Hey, thanks, Carleen. Thanks for having me on. As you mentioned, Taylor Forst, been with Alliant for just over 5 years, around 13 years of experience in the industry, and kind of that whole time has been focused on property line of coverage, and really specifically in the public sector; states, risk pools, large cities, counties, K-12, you name it, that's our bread and butter. Yeah, happy to talk about some of the things we are seeing some of our clients do. You mentioned the craziness in the marketplace right now, and I think property is probably the headliner of all of the craziness. Our clients are coming to us, asking for us to present them with creative solutions for things that they haven't maybe been able to work into the budget before.

Carleen Patterson (01:19):

Yeah, it's like you have been there probably the entire time you've been here at Alliant has been a hard market and a lot of difficult conversations. In the last probably 12 months with the changes in the property market, one of the things that we had been talking during the hard market was parametric products. And the clients were really looking for ways to try and deploy their premium spend in a different way. And talking about parametrics less when it's a softening market, however, some of the key challenges that insureds are experiencing make it difficult to maybe contemplate in that traditional insurance market. I guess, spoiler alert, as far as one of the creative parametric triggers that you have put together for a client had to do with heat index and soaring temperatures, right?

Taylor Forst (02:10):

Yep, absolutely. The market's sort of done a 180. It's now "how can we use some of this premium dollars that has been freed up to have our risk posture better formulated for what might be there?" So it's transitioned from "How do we compliment our program?" to "What other perils are out there that aren't necessarily normally contemplated by a property policy?" So you hit the nail on the head cutting right to the chase. We have a client out in the Southwest and with what they're facing on a yearly basis with regards to extreme heat, there's a lot of financial exposure there that doesn't really fall under the umbrella of direct physical damage that a property policy is geared to really indemnify for. You think of all of the costs that a government historically has had to either budget for or just take onto their balance sheet without any sort of risk transfer, that could be things like paying workers overtime or setting up cooling centers or things like that. There is actually a way to have a policy set up so that there is an indemnity component where some of those costs can be reimbursed once they are incurred.

Carleen Patterson (03:11):

Yeah, definitely not covered under your traditional insurance policy, but definitely a gap and an expense that a public entity would incur in the event of something like that. I guess we probably should backtrack a little bit. And then when I always talk about parametric, it's basically if we can define it and if we can put some sort of parameters around any situation, whether it be snow, fall, anything else, it's something that we can solve for through a parametric. And in this case, your problem had to do with extreme heat, right?

Taylor Forst (03:45):

Correct. So yeah, if the data's available, these parametric underwriters have done a phenomenal job of looking at ways to be creative and fill in those gaps. Heat, snowfall, you mentioned, those are things that the record goes back to 100 years that we can really go back and sink our teeth in to determine what is an appropriate level of risk to take on and what's appropriate to transfer. I think the balancing act is sure, there's an option for coverage, but how do we make it affordable, but also walk that fine line where, it will pay out should there be a need. We put our heads together with this client and we looked back at some of the things in their recent history that have caused spikes to occur where they are paying out this money. And we started looking at several different structures and ultimately landed on the one that I think we'll get in here in a little bit. It's all about, like I said, walking that fine line between making something viable but also affordable. You don't want it to pay out every day of the year because then it's going to cost you, but you also, if you're going to buy, be buying a product, you have to make sure that it is going to pay out when the need arises.

Carleen Patterson (04:45):

Yeah. I guess part of it is the conversations you had with the client and trying to determine the ultimate structure. But so I guess we start out with how does this policy actually work? What are the parameters for a payout?

Taylor Forst (04:59):

Yep. So we, in order to make it affordable, I think we wanted to structure it so that it was really just those heat wave type events that were being discussed and underwritten. We didn't want it to be a one-day maximum hits 115, 120 degrees because I think those are so frequent that there wouldn't be a way to underwrite that in a way that made sense. And also the city can appropriately budget for those. So we kind of took a step back and what we landed on was the 10-day rolling average. We thought that was enough of a duration of time that if you're above a certain threshold for a 10-day period, that is when the populace and the citizens really do need that help and support. And that is how we reverse engineered it, if you will, working backwards from there. We also looked at structures just using as a rule of thumb, like where can airplanes not take off? There's a temperature where it's unsafe for airplanes to take off and we ultimately went into another direction, but we kind of left no stone unturned looking at different measuring tools or different parameters.

Carleen Patterson (05:55):

So does this policy have some different payouts depending on, you know, you're talking about a 10-day rolling average, but is there like the most it will pay out? Are there some incremental levels? I'm thinking about hail triggers where you have different sizes of hail, different payouts, that kind of thing. Is there some sort of graduated payout?

Taylor Forst (06:18):

Great question. I think the structure of the parametrics that we're almost familiar with are you hit a certain threshold, 25% of the limit pays out, you hit another one, 55%. And then certainly once you get to a sort of severe cat scenario, that's when the 100% is triggered. The way that we look to capture and protect the way that the insurance company paid out was we went with a daily maximum with an annual aggregate. So anytime that this threshold is met, those daily payouts give the city an infusion of cash. I think that you can set up and take down some of these things really quickly. So if there's a five-day period where this threshold is met, it'll pay out five times the daily maximum up until that annual aggregate is eroded.

Carleen Patterson (06:58):

Oh, that is a really creative way to structure it because that's not typical. So has anyone ever done anything like this before, written this type of product?

Taylor Forst (07:07):

So that is certainly something that everyone that has been involved has been very curious about. And so far we've been able to confirm this is the first product of its type in the public sector. We're unsure about other sectors, but we suspect it's the first of its type anywhere. But for the purposes of this conversation in the audience here, this is the first public sector extreme heat parametric product.

Carleen Patterson (07:29):

All right. And do you think this would be a good model for maybe other public entities confronting these types of extreme heat?

Taylor Forst (07:37):

I certainly do. Without oversharing, I think the way that we structured this, it's a very affordable policy and we're very pleased to report it's actually already triggered. So there will be a payout forthcoming to the insured, which we're just tickled about. So I think it certainly demonstrates that there is an appetite for the carriers to be in this space. We had quotes from multiple different insurance companies willing to write it, which obviously is great from a competition standpoint. And I think that sort of the proof of concept is there with this client where they are going to be getting a payout, which will hopefully kind of go a long way towards alleviating some of the issues caused by these heat waves. And I think this can be, you know, easily replicated for other sort of entities in the Southwest, certainly in Texas where you are, Carleen. I think there's a big application.

Taylor Forst (08:22):

I think the biggest takeaway maybe is no matter what sort of that peril or scenario that keeps a risk manager up at night, whether or not you think it might be covered by a parametric product, there are creative ways that we can structure these so that maybe we can transfer just a little bit of that risk, which maybe the time is right to look into these with the way that the property market has trended over the last 12 to 18 months, I would say.

Carleen Patterson (08:47):

Just having this conversation, it certainly has triggered some thoughts in my mind about how to chat with some of my clients about this solution and maybe structuring something real similar. So I'm excited to have some further conversations with you about it. So thank you very much for joining. To everyone, thank you very much for joining us today and let us know if you have any questions and looking forward to the next episode of In the Public Eye.

Taylor Forst (09:15):

Thanks, Carleen. Appreciate you having me on.