Today’s news that the CCRIF SPC and the World Bank have successfully sold their first parametric insurance products for the fisheries industry got me thinking on a flight back from Zurich.
This product is a first of its kind (at least I think it is).
A parametric insurance product designed to protect an industry as well as those who work in it.
As the CCRIF explained, it’s both livelihood and sovereign risk transfer, in a single product.
Wrapped up beneath a parametric trigger is both tropical cyclone wind coverage for a Caribbean island or Central American nation fishing sector, alongside “bad weather” protection for the fishing communities’ jobs and income.
The trigger therefore will payout to protect assets and infrastructure associated with a country’s fishing industry when a tropical cyclone of a specific severity or greater occurs.
While also paying out when stormy weather impacts fishing communities’ livelihoods.
Alongside the CCRIF’s core tropical cyclone and earthquake parametric products for the sovereign buyers, this new industry-specific cover truly means the Facility is protecting both lives and livelihoods, as well as providing responsive and rapidly paying risk transfer protection.
Providing contingent capital in a manner akin to shock absorbers for people’s lives and corporations business cycles.
This CCRIF / World Bank parametric product extends the safety net provided by insurance and risk transfer, something we need to see a lot more of.
It fills gaps in coverage, protects gaps and meets all the mandates of a product that helps at all economic levels (protecting government, industry, tax payers and all those relying on a sector).
This approach provides an almost layered risk transfer and protection product.
An all in one approach to covering a vertical slice of the economy, from top down to the smallest contributing people.
Can the same model work elsewhere?
Definitely. Think of any other industry or sector where there are impacts to productivity from severe weather or natural disasters.
By covering the economic productivity of a specific industry with a responsive parametric insurance product, the government benefits, the industry benefits, the workers benefit, and their communities do too.
Communities that rely on the ability of their fishing fleets (or farmers, or other relevant industry) to provide income, food and broader economic activity can benefit hugely from this approach.
While at the same time the sovereign level means the government can help itself, the industry in question and its people to recover, without needing to borrow, raise taxes, or apply pressure on communities at a time when they’re stressed anyway.
For years I’ve been thinking that the way to really narrow the much-vaunted protection gap is through tiered risk transfer approaches, responsive triggers, data / technology and efficient capital.
One of the issues that’s almost always missed in these discussions is that without some sort of coherent and complementary protection at each of sovereign, capital / investment, industry and community level, you leave key layers in the economy exposed to stresses.
In the event of disaster these stresses at any level cascade through the tiers and can even be amplified (especially when the gaps are from the top down).
When major natural catastrophes strike it can cause capital flows and investment to dry up, hurting the sovereign economy, industry and community layers.
Industry can be damaged and disrupted, affecting sovereign economy and community layers, with the potential to put off capital flows and investment as well.
Impacts to communities destroy lives, homes, businesses and that can affect productivity and all the other layers as well.
Confidence impacts can hurt across the tiers too.
The CCRIF’s new fisheries parametric product solves for some of these issues, by protecting across tiers right down to the economy.
It’s also a form of protection for the essential capital flows and investment that could back a country’s fishing industry as well.
That’s pretty unique to be honest (although I’m sure someone will know some other examples).
How effective it is has yet to be proven, it’s only just launched.
But this responsive parametric protection model has huge potential to be taken, utilised in other ways and means, to the benefit of millions of lives and livelihoods across sectors, continents and specific industries.
It’s intelligent and innovative risk transfer product design in action and for that I applaud the teams behind it.
It’s a sign of the future of risk transfer, a responsive, efficient, direct and highly complementary life and livelihood buffering financial support tool.
Add in real-time and a great deal of extra sophistication, which given the technology available to us now will in time transform the risk transfer sector. As well as the efficient, unbundled, lower-cost, product design focused approach I spelled out recently here. You have a good example of an insurance product (a shock absorber) that is fit for our future.
There’s a model for risk transfer product design emerging and it promises better protection, more closely aligned with user needs.
The old products of indemnity and the like won’t go away and are key here as well.
But, taking a step beyond designing new products alone, designing new systems for risk protection, where traditional and modern product designs dovetail neatly into a single ecosystem of protection, will get us all closer to the answers we seek.
Yes, I’m channelling Nicolas Colin and borrowed ‘safety net’ from his excellent book “Hedge: A greater safety net for the entrepreneurial world” (go buy it).