The retail industry is facing several emerging risks that can have a severe impact on revenues. These include changing weather patterns, supply chain disruptions, and the consequences of the digitisation of business processes. Where existing risk mitigation measures are insufficient or traditional insurance policies are unable to cover the risk, parametric insurance solutions can plug the gaps.
The role of parametric insurance
To ensure retailers remain relevant and effective in a rapidly evolving environment they must prepare for potential future disruptions and develop and regularly review risk mitigation strategies. However, no risk management strategy can eliminate all risks, and it is, therefore, worth exploring alternative risk transfer options, particularly for emerging risks.
Parametric insurance pays out according to predefined triggers based on independent data and offers an efficient and flexible tool to plug gaps in the traditional insurance portfolio. It can, for example, protect against third party supplier risk, supplement sub-limited exposures and protect against non-damage business interruption events when linked to a natural disaster. This could be for example a lack of precipitation or too much of it.
A business must suffer a loss from the pre-defined trigger event for a parametric insurance to pay out. But, unlike traditional insurance, there is no need for loss adjusters to determine the loss and there are no exclusions for any assets or business interruption losses.
For some risks such as flood the trigger might be obvious, but for other risks selecting an appropriate trigger can be more complex. The key is that the data source for the reporting agency is independent of both the client and the insurer to ensure complete transparency in the contract. There are various data sources available to measure and trigger policies. Lockton works with several data providers to structure and price a solution that suits the individual needs of each client.
Advantages of parametric solutions:
Business interruption doesn’t require a physical damage trigger
There are no deductibles
Contracts are transparent and simple
Claims are usually recovered within 30 days as there are no lengthy loss adjuster requirements
Parametric solutions are by their very nature bespoke and uniquely tailored to the risks of each individual business. Set out below are some examples of circumstances where parametric solutions can be deployed.
Supply chain risks
The global supply chain is a vital component of the retail industry. Weather events such as typhoons, floods, and droughts can severely disrupt manufacturing processes and transportation networks. Factories may face shutdowns, and transportation routes can become impassable, leading to significant delays in the delivery of goods.
Tracking devices on vessels, for example, provide real-time data, and can serve as a trigger for payout when delays reach a certain threshold, allowing retailers to stabilise revenue during unexpected events whilst supplying a buffer for those reliant on the global supply chain. A wide range of events can cause delays in the supply chain and extend shipping lead times, including labour strikes or congestion at the ports, increasing costs for retailers, who may need to seek alternative suppliers or expedite shipping through more expensive means.
Retailers dependent on just-in-time inventory processes are particularly vulnerable, as any disruption can lead to stockouts and lost sales. Increasing global instability and the impact of climate change will inevitably impact retailers’ risk exposure and require long-term strategies to enhance and increase the resilience of supply chains.
Weather impact on revenues
Weather patterns have become less predictable and risk mitigation measures such as flexible inventory management and data analytics can only limit losses. A surprisingly mild winter can severely impact sales of coats, boots and winter accessories, and the excess inventory and reduced revenues force retailers to offer deep discounts to clear stock. Similarly, retailers specialising in garden products and furniture may experience a decline in sales in a wet and cold spring.
Technological advancements have created new data points that can serve as triggers for parametric insurance solutions. For example, retail sales data can be analysed to track irregular sales patterns and how well inventory is performing during abnormally mild winters. By looking at historical weather patterns and purchasing trends, we can use data to predict future inventory demand. Parametric solutions can structure an index with this data to create a policy that triggers when there are irregularities in weather which affects the sale of winter inventory. This can help to mitigate excess stock, reduced revenue, and the need to sell of stock at lower-than-desired costs.
Flood
Parametric solutions can protect properties in flood exposed locations. Cover will be based on a selected indemnity value which is paid once water breaches an agreed trigger depth limit. The water depth is monitored by a mobile-connected sensor installed at the insured location and once the trigger depth is breached the claim gets paid. Cover is flexible and can be arranged to pay out different indemnity amounts at varying depths: businesses can choose a lower depth/lower indemnity limit to cater for a flood that may just result in clean-up costs and select a higher indemnity/depth for more catastrophic flood events, for example.
Communicable disease
As a result of the pandemic, communicable disease is now a firm exclusion under all policies within the traditional insurance market. However, the parametric market continues to provide an option to write back this coverage. Retailers can purchase protection with triggers such as government-mandated lockdowns, restrictions on movement, or decisions from industry standard organisations such as the World Health Organisation.
For further information, please visit the Lockton Retail Practice Group (opens a new window) page or contact your Lockton representative.
