LM Re's Belin: Northern Italy floods have driven increased interest in parametric covers

By Henry Gale

March 5 - (The Insurer) - Liberty Mutual Reinsurance has started offering a parametric product based on flooding extent in Italy amid increased demand for alternative solutions, senior underwriter Charlotte Belin told Parametric Insurer.

Flooding in Italy's Emilia-Romagna region in 2023 resulted in economic losses of $9.8 billion, according to Aon, while 2024's Storm Boris caused hundreds of millions of euros in damage when it brought extreme rainfall to some of the same areas. Other parts of northern Italy experienced severe floods and landslides during 2021.

"The increased interest in parametric cover in Italy has accelerated in the past few years, following the massive flood events that hit northern Italy," Belin said. The organisations requesting coverage include medium-sized businesses, large industrial facilities, (re)insurers with flood-exposed portfolios and the public sector.

Constraints in traditional property coverage, including lower limits, higher deductibles and exclusions for non-damage business interruption, are a key factor driving this demand, according to Belin. Parametric covers are often used to cover risks that are excluded from indemnity-based policies or to buy back deductibles, rather than replacing traditional insurance.

For organisations looking to cover physical flood damage, LM Re offers parametric covers that pay claims based on water depth, measured by physical sensors on site or at local river gauges. During 2024, it worked with specialist data firm Floodbase to develop a second product for business interruption losses. This product uses satellite imagery to determine how much of an area is flooded and trigger payouts accordingly.

"The idea is to consider the extent of the flood around the site(s) as a proxy for the loss suffered," said Belin. "This is particularly well-suited for commercial use cases where floods around the sites generate safety issues, supply chain disruptions, logistical complications, site accessibility issues with an immediate loss of customers and a direct impact on the turnover of the company."

New rules in Italy will make it compulsory for businesses to purchase insurance for natural catastrophes, including flooding, by March 31. The outlines of this scheme had not yet been finalised when Belin spoke to Parametric Insurer and she said the potential eligibility and role of parametric insurance remained to be clarified.

"However, parametric insurance is likely to play a role in the Italian catastrophe insurance landscape for several reasons: it is by definition adaptable, there are a wide range of available products, and a large variety of use cases it is able to cover," she said.

"A large amount of capacity will be needed if all businesses must access catastrophe insurance, and traditional catastrophe capacity might be limited. Parametric as alternative risk transfer is a viable method of complementing traditional capacity."