Parametric Insurance

The parametric insurance product is a tailor-made cover designed by using an independent parameter, generally a weather index, which is correlated to the clients’ revenue stream or cost structure.

Once the agreed-upon index is reached, payout is triggered and clients receive compensation within only a few days, providing a truly seamless customer experience.

This insurance product can be applied to many different types of clients in numerous industries. That being said, in today’s changing climate and in the face of the green energy transition, parametric insurance is a particularly well-adapted risk management solution.

Increasing weather volatility and weather extremes are causing a surge in demand for renewable energy insurance. In the past two years, investments in renewable energy surpassed those in non-renewable.

Per Bloomberg energy finance analytics, in 2015 alone, more than twice as much money, about US$ 260 billions, went into clean energy compared to non-renewable energy.

Additionally, due to today’s changing climate, the occurrence of weather anomalies has increased greatly.

According to the Intergovernmental Panel on Climate Change, weather anomalies have increased fivefold in the past 50 years. For that reason, renewable energy production is highly intermittent – the sun does not shine every day, all day, the wind does not blow all the time, and heavy rainfall and drought events are increasing worldwide. Due to this increased unpredictability of energy production, securing investments is key.

Let us take the example of a solar photovoltaic plant, seeking revenue insurance against lack of solar irradiance. A solar plant is highly exposed to the risk of the sun not shining, which will impact its revenue month-to-month and year-to-year. 

In order to create the most relevant cover, AXA CS works together with the client to best understand their insurance needs. Their data science experts model photovoltaic production, and their team of underwriters agree upon the risk period by studying the plant type, location, and installed capacity. To design the best index for existing plants, the parametric team uses the plant’s historical production data over the longest period and correlates it to their weather data.

As such, parametric insurance is a means of smoothing revenues year-to-year. Without a parametric cover, the client would be left with highly volatile, unpredictable revenue depending on weather conditions and other factors. With AXA’s parametric cover, the client can guarantee smoothed revenues.

Through satellite imagery, AXA’s team of experts are able to capture and work with more and more sophisticated weather data. Satellite images give access to wind speed, wave height, solar radiation, precipitation, and many different indices that, combined with sophisticated Big Data processing methods, enable the development of extremely accurate parametric insurance products.

The team expects that, thanks to the continuous advancements in technology and Big Data processing methods, parametric insurance will continue to grow greatly. Over two years, AXA’s parametric team has developed the global reach and technical expertise to manage various risks in this evolving industry, and today the team operates in over 27 countries worldwide.

Today’s fast-evolving, complex world generates an ever-increasing number of risks that cannot be covered by traditional insurance or financial products.

Corporations are increasingly interested in Risk Financing Solutions and Alternative Risk Transfer (A.R.T.) solutions to mitigate the impact of losses on operating accounts (loss of income, loss of profit, additional working costs, costs & expenses, loss of assets), by providing a dedicated budget to finance future losses and pooling the exposures of various subsidiaries and/or operating entities.

This is also an important concern for renewable energy activities. Those risk financing facilities provide organizations with protection against financial loss arising from risks including penalties, non-damage business interruption, loss of access, reputational or brand damage, supply shortage, loss of footfall arising from a wide range of events such as changes in legislation/ regulation, political risk, cyber-crime and IT failure, pandemic/epidemic, terrorism threat, exceptional climatic events in addition or alternative to traditional parametric transfer.

AXA CS’ A.R.T. department works closely with clients and brokers, utilizing their vast experience to design tailor-made mechanisms to smooth P&L volatility. The A.R.T. experts are able to design and implement structured protection programs with or without captives, integrating risk financing for non-insurable risks with traditional covers to set up a holistic solution.

Combining parametric solutions with A.R.T. is especially interesting for clients for a few reasons. Firstly, parametric insurance is extremely flexible in terms of budgets. Premiums, capacity, triggers, and limits are entire malleable. The risk manager, captive manager, broker, and insurance company work together to co-construct the best-fit solution financially.

Secondly, parametric insurance is flexible in terms of geographies and types of risks. Parametric insurance can be adapted to risk anywhere in the world, in many geographical zones or in one specific location.

Additionally, parametric insurance can cover multiple types of risks, as long as it is based on an independent and verifiable index.

Finally, parametric insurance combined with A.R.T. is a means of opening new frontiers of insurability. Parametric insurance allows to cover risks not typically covered by standard insurance policies (e.g. property). Combined with captives, this brings a new frontier of insurability, opening up a world of possibilities.


By Marine Charbonnier (Head of Risk Financing Solutions at AXA) and Tanguy Touffut (Global head of Parametric Insurance at AXA)