KEY TAKEAWAYS

• Parametric insurance is based on a ‘triggered’ event rather than a claim for actual harm or loss. It’s an insurance alternative that’s good for the customer and it looks like it’s here to stay. It basically covers the probability of a predefined event happening and pays out an agreed amount instead of compensating for the actual loss incurred. Claims are settled quickly, the payout is certain, and it allows the customer to plan ahead.

• Although still in its infancy in Australia, it is likely to show strong growth over the coming years as triggers can be better defined, especially as AI and robotics allow technology to make decisions, replicate human actions at scale and with precision.

• The future of parametric cover could see it applied across a wide range of industries and events, including agriculture, tourism & travel, retail, shipping, natural landmarks impacted by climate change, terrorism and even brand sentiment.

What is Parametric Insurance?

Parametric insurance is growing at a rapid pace around the world and is being praised as an attractive alternative to some traditional insurance policies.

Even if it does sound a little complex, parametric insurance (or event-based insurance) is simpler than traditional cover. Compared to a typical insurance claim which compensates for harm or loss, parametric insurance pays out a pre-agreed amount based on a ‘triggered’ event using objective data sets that neither the insurer nor client controls.

“Global parametric premiums have reached $US5 billion and are growing by 6-9% every year”.

When could parametric insurance be used?

Natural catastrophes or extreme weather events are currently the most prominent triggers as they can be defined by magnitude (e.g. earthquakes, tropical cyclones, floods), or wind speed or precipitation metrics. However, there are also other applications where payouts can be calculated using robust data points, including triggers for market indices, power outages, crop yields or even online sentiment for insuring a brand’s value.

How does parametric insurance work?

Below are a few case studies of how parametric insurance has been implemented throughout the world, followed by a couple of opportunities closer to home that we could potentially see put in place.

Case Studies

Case study 1: global insurance company, CelsiusPro, worked with the Ethiopian government to cover 15 regions and 6,500 farmers across the country with parametric insurance, so that in the event of a drought the farmers get paid out by the government. (Source: ABC News)

Case study 2: an owner of an open-pit salt mine in northern Australia was required to evacuate the site in the probable event of a cyclone. As a result, the owner had to undertake costly and time-consuming geotechnical studies before operations could resume. To address the problem, a parametric product was offered which would pay out in the event of a tropical strength cyclone. The payout would be triggered if the cyclone fell within 100 kilometres of the mine. (Source: qic.com.au)

Case study 3: In January 2019, Swiss Reinsurance Co. launched FLOW, a parametric water-level insurance product designed to protect companies from the financial impact of high or low river water levels. The direct physical effects of low water levels are almost non-existent, but the indirect costs to businesses that depend on rivers can be significant. (Source: Corporate Solutions Swiss)

Opportunities

Opportunity 1: after the expensive drought bail-outs of 2014 and 2018 in Australia, and the effects of climate change likely to bring more droughts in the years to come, parametric insurance within the agricultural industry is being taken a lot more seriously. With the addition of hundreds of new meteorological stations over the past decade and the rapid advancement in technology, farmers and insurers can now more accurately evaluate trigger data and forecast how acute their risk is of an intense dry period, wet harvest or even the potential for frost. This makes it particularly helpful for farmers in remote areas like much of the WA and NSW wheat belts.

For example, cover could be agreed at $1M based on there being more than 30 days of frost during winter (like many parts of NSW saw in 2018), and should that target be exceeded, the farmer would be paid out the $1M regardless of the damage suffered or the costs incurred to replant the crop. Cover could also even be implemented as little as 15 days out before harvest.

With extreme weather events causing up to 70% of crop loss in Australia, parametric insurance can give farmers added protection and greater confidence for their farming future.

Opportunity 2: a 2019 report by global firm Clyde & Co recommended implementing a risk management plan for the Great Barrier Reef in order to guarantee its long-term resilience against climate change and potential catastrophic events. Where there was previously no option for cover of the reef, parametric insurance can provide the $56B tourism asset with a security blanket, protecting it against any further coral bleaching, ocean acidification or pollution.

What are the benefits of parametric insurance?

Parametric insurance opens up a new avenue for risk coverage and can provide significant benefits to both insurer and customer.

It covers risks that traditional insurance can’t

• People in areas hit by a catastrophic event in the past would find it very difficult to get cover on a traditional policy as the risk involved is simply too high. By insuring against the likelihood of an event happening as opposed to actual damage caused, parametric insurance reduces the cost and uncertainty for those who have previously been excluded.

It is able to service remote customers

• As parametric insurance relies on data to pay and assess claims, it becomes a lot easier for insurers to be able to assess and pay claims for those that live in remote areas. For example, a farmer’s crop can be covered based on agricultural indices such as crop yield, excessive temperatures or heavy rainfall.

It provides a transparent claims process

• Parametric insurance relies on a pre-agreed payout, so claims are processed quickly and efficiently. There is minimal paperwork required, no lengthy claims investigations and no disputes. With such a seamless process in place, it can also end up improving the overall customer and brand experience.

It’s becoming a valuable asset for brokers

• Parametric insurance adds another valuable tool to a broker’s tool box. It gives them the opportunity to fill the gaps left by a traditional insurance policy, or the option to provide a policy that couldn’t be placed previously. Brokers can ultimately provide clients with a policy that is all-encompassing, alleviating any uncertainty.

The future of parametric insurance

Although the market for parametric solutions in Australia is still in its infancy, its possibilities are only just being realised.

Advances in data science, sensor technology and artificial intelligence have enabled vastly superior data collection and analysis methods to be developed. Over time, this will allow insurers to evolve the modelling of data and indexes upon which payout triggers are based, price cover more accurately and provide a more bespoke selection of cover across a variety of industries.

With artificial intelligence at the forefront, the new generation of parametric insurance solutions could include protection for things like cities and airports in the event of terrorism, coverage for shipping and manufacturing companies when river water-levels fall, solutions for retailers in the event of reduced foot traffic during strikes, or economic assistance for hotels in the event of infectious disease outbreaks.

Just as many products and services have evolved by taking advantage of improvements in data science, parametric insurance cover looks to provide a more efficient insurance product that’s fitting for the modern age.

Key takeaways:

• Management Liability (ML) Insurance covers directors and officers against the exposures & risks that come with managing a business.
• An ML policy protects you and your business against things like: OH&S dramas, harassment, defamation, fines, fraud, theft and data breaches.
• ML claims have increase 300% over the last 5 years, with the average penalty awarded against companies costing $62,000.

There are a multitude of risks facing small businesses in Australia’s challenging economic environment today. New and often complex legislation are always on the horizon where companies can also expect increased exposure to liability and fraud.

 

"As a business owner, you automatically take on the risk of being personally liable for the consequences of any unintended errors arising from your own daily actions, or even the actions of your employees".

The changing regulatory environment in Australia has increased the operating risks for businesses of all sizes – workplace accidents are now subject to high statutory scrutiny; employee theft is on the rise, while employment and commercial disputes are becoming more and more expensive to resolve.

If you’re a business owner, director or senior manager/officer of a private company, you automatically take on the risk of being personally liable for the consequences of unintended errors arising from your own daily actions, or even the actions of your employees.

 

WHY SHOULD YOU INVEST IN MANAGEMENT LIABILITY INSURANCE?

Irrespective of industry or company size, without adequate protection you could risk losing not only your business, but also your personal assets – such as your home – from being sold to cover the cost of paying claims. This insurance protects you personally, and therefore your wealth and lifestyle.

Claims can also be brought against directors and officers from every angle. Disgruntled shareholders, customers, investors, employees, competitors, regulators and creditors all have a legal entitlement to launch action if they feel directors and officers have not lived up to their responsibilities.

 

WHAT CAN A MANAGEMENT LIABILITY POLICY COVER YOU FOR?

The three most common management liability claims are for employment practices such as bullying, harassment and wrongful dismissal. But ML covers a range of risk exposures affecting directors and officers of private companies.

"Claims can be brought against senior management from every angle, including disgruntled shareholders, employees, customers or competitors". 

 

Many businesses think it won’t happen to them, but statistics show otherwise.

MANAGEMENT LIABILITY INSURANCE CLAIMS EXMPLES:

• A customer database was illegally breached, and personal information was compromised. The costs of advising the customers plus the legal representation were covered by their ML policy.

• A manufacturing employee manipulated the accounts payable system to create non-existent customers and generated purchase orders and invoices to transfer money to the fake accounts, by accessing other employee authorisation details. An internal audit eventually discovered the total losses.

• A senior employee is dismissed after lodging complaints of bullying and aggressive conduct by the managing director. Complaints are also made of racial discrimination and disability discrimination. Action is commenced in the Federal Court and the matter is settled for a 6-figure sum.

 

WHO CAN BRING AN ML CLAIM AGAINST A COMPANY, ITS DIRECTORS, OFFICERS AND EMPLOYEES?

• Regulators (e.g. ACCC, ASIC, the ATO)
• Employees
• Competitors
• Creditors
• Shareholders
• Clients
• Liquidators/Administrators

 

WHAT USUALLY ISN'T COVERED IN THE POLICY?

Generally, the policy won’t cover cyber-crime (unless specifically set out in your policy), employee entitlements, property damage or bodily injury. There may be other exclusions included in your policy which your broker can outline for you.

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Without Management Liability insurance, you become exposed to significant financial loss, disqualification from your position, or even bankruptcy. With such penalties, it shows there is a clear need for an effective way to protect your business.

So why take even the slightest chance of putting your business or personal assets at risk? ML cover can provide you with peace of mind, leaving you to focus on what you do best.

Continuity of business is a significant issue for employers and their employees during this unprecedented and difficult time. FairWork Australia have developed the below coronavirus information to help employees and employers understand how coronavirus impacts Australian workplace laws.

Find out about your workplace entitlements and obligations if you're affected by the outbreak of covid-19, including information about stand-downs from work, working arrangements impacted by school closures, and pay and sick leave entitlements.

Arranging Flexible Work

There are a range of flexible working arrangements that employers and employees can explore together. These include:

• working from home
• changing the number of hours an employee works
• changing the start or finish times of employees' shifts
• changing patterns of work, such as rostering arrangements
• changing the type of work done by employees.

Employers and employees need to consider and comply with any requirements under the Fair Work Act, an applicable award, enterprise agreement, employment contract or workplace policy.

Using paid leave

Employers and employees are encouraged to explore options that enable an employee to take their accrued leave entitlements during the coronavirus outbreak. Options include:

• taking accrued annual leave
• taking any other paid leave (such as long service leave or paid leave available under an award, enterprise agreement or employment contract)
• directing employees to take accrued annual leave in certain circumstances
• taking any other paid leave by agreement between the employee and the employer.

Using unpaid leave

In many circumstances, employees won’t have access to paid leave during the coronavirus outbreak. For example, if they are permanent but have already used all their accrued leave entitlements. In these situations, employers and employees can agree for an employee to take unpaid leave.

Under the Fair Work Act, unpaid leave is also available for employees in certain circumstances, such as unpaid carer’s leave for casual employees.

Standing down employees

Employers may be able to stand their employees down without pay during the coronavirus outbreak for a number of different reasons. These can include where:

• the business has closed because of an enforceable government direction relating to non-essential services (which means there is no work at all for employees to do even from another location)
• a large proportion of the workforce is in self-quarantine meaning the remaining employees can’t be usefully employed
• there’s a stoppage of work due to lack of supply for which the employer can’t be held responsible.

Importantly, employees can be stood down without pay under the Fair Work Act if they can’t be usefully employed because of a stoppage of work for any cause for which the employer can’t reasonably be held responsible.

More information here: Business closures during coronavirus

Ending employment

If other options have been exhausted, or if they aren’t feasible, some employers may need to make their employees’ positions redundant in response to a business downturn caused by the coronavirus outbreak. Where this happens, employers must make sure they comply with any requirement to notify and consult about the redundancies under an applicable award, enterprise agreement, employment contract or workplace policy, and make reasonable efforts to find their employees other jobs.

They also need to provide those employees with their correct entitlements, which may include notice, redundancy pay and payment of any accrued leave entitlements.

The Fair Work Act protects employees from being dismissed for a number of reasons, including:

• because they are temporarily away from work because they are sick (such as with coronavirus)
• discrimination
• any reason that is harsh, unjust or unreasonable or another protected right.

More information:

Ending employment during coronavirus

Notice and Redundancy Calculator

Business bankruptcy & insolvency

During these challenging and unprecedented times, some businesses may need to close because they are no longer profitable or run out of money.

This can mean that employees lose their jobs, and in some cases where a business is bankrupt or goes into insolvency, employers may not be able to pay their employees the wages and entitlements they’re owed.

When an employer is bankrupt, or goes into liquidation or insolvency, employees may be able to get help through the Fair Entitlements Guarantee (link below).

Sometimes, an employer might close their business and abandon it without placing it into liquidation. Where this happens, the Australian Securities and Investments Commission (ASIC) may be able to help recover unpaid employment entitlements.

More information:

Bankruptcy & liquidation

Fair Entitlements Guarantee

Please refer to coronavirus.fairwork.gov.au for further information relating to the above. This page also houses links to advice on health, childcare, business support, workplace health & safety, tax & superannuation and online safety.

Finally, visit www.australia.gov.au for the latest coronavirus news, updates and advice from government agencies across Australia.

Crystalline silica is a natural mineral found in construction materials such as concrete, bricks, tiles, mortar and engineered stone. When these materials are worked on, silica dust is released. As its particles are 100 times smaller than ordinary sand, it poses a significant health hazard and could rival the impact of asbestos in the years to come.