Aon focusing on parametric insurance approach

Aon has been developing its approach to parametric insurance through some “first of their kind” deals with corporate clients, Kurt Cripps, managing director, Aon Benfield told StrategicRISK.

Onshore energy pipelines and offshore cable-laying provide two examples of recent parametric deals placed by Aon for commercial risk clients, according to Cripps.

One such deal was for a Chinese contractor laying offshore fibre-optic cables in the waters off Cambodia. High winds or waves would mean costly delays to the cable laying.

Parametric data – for 2.5m wave heights and 20mph windspeeds and accurate down to a 250m x 250m level – were used for a weather risk policy with a $2m limit, according to Cripps.

Another, larger deal was for PLH, a private equity-owned pipeline contractor, which had been awarded a 450-mile crude oil pipeline project, spanning from Oklahoma to Tennessee.

The owner will generally push weather risk to the contractor for such pipeline deals, he suggested. In this case the parametric cover provided a $15m limit for PLH, according to Cripps.

Extreme rainfall during the project posed significant schedule risk threatening the profitability of the project and exposing the client’s balance sheet.

PLH needed an alternative method to transfer weather risk that could negatively affect the project.

“Put simply, you can’t dig a trench for a pipeline when there’s bad weather,” said Cripps.

“We looked at long term trends of average versus adverse weather, using government data from the NOOA [US National Oceanic and Atmospheric Administration] to a 4x4km granularity,” he said.

Such NOOA data typically relies on a mix of satellite and ground data from weather stations, as well as buoys out at sea and weather balloons in the air.

“Initially they were worried about rainfall above 40 inches but using the data it was clear it had never rained above 19 inches, so we were able to agree on a daily and cumulative cover triggering at 20 inches,” said Cripps.