Parametric Insurtechs Could Be the Future. They Can Thank Insurers and Fossil Fuel Companies.
Plus, SEC Commissioner Hester Peirce weighs in on prescriptive rulemaking and its impact on crypto innovation
Number of the Week: $700 million (explanation below)
Parametric Insurtechs Could Be the Future. They Can Thank Insurers and Fossil Fuel Companies.
As the severity of the global climate crisis worsens, its disastrous effects are irrefutable: The world is hotter, drier, wetter, and prone to more frequent and extreme storms. What’s less clear: when the top three emitters of greenhouse gases (GHGs)—China, the United States and India—will significantly accelerate their reduction targets, how wealthier nations are going to invest in developing countries’ transition to clean energy alternatives without increasing their economic, political and population vulnerabilities, and what’s to be done about the energy sector, the single largest emitter of any sector, which accounts for 76% of global emissions.
Climate change is a global problem with profound and painful local and regional socio-economic consequences. After world leaders from 197 nations plus the European Union and corporate executives convened in Dubai for the United Nations Convention Framework on Climate Change 28th Conference of the Parties (COP28)—increasingly referred to as “the new Davos”—the final agreement was met largely with anger and cynicism because the text failed to explicitly call for fossil fuels to be phased out. Rather, it referenced “transitioning away” from them toward clean energy. There were other areas of disappointment and dashed expectations, according to the World Resources Institute, including climate finance, adaptation targets, and loopholes that favor oil- and gas-producing countries and fossil fuel interests.
Those fossil fuel loopholes could be getting a perversely counterintuitive assist from insurance companies, whose investment and underwriting practices related to fossil fuel companies and projects generate short-term, in some cases huge profits but contribute to growing negative climate and environmental impacts that increase their costs, compelling them to hike premiums and exit certain markets.
Yes, you read that right. Insurance companies are both benefiting from and falling victim to the fossil fuel activities in which they are involved (more on that below). U.S. insurers alone reportedly hold some $536 billion in fossil fuel investments. On the underwriting front, the global insurance industry earned about $21.25 billion from fossil fuel insurance, according to market intelligence firm Insuramore’s most recent data on the sector. Climate losses for insurance companies, however, are reaching unsustainable levels, raising serious questions as to why the industry would continue to invest in and underwrite companies whose fossil fuel production or deforestation operations harm the environment and, by extension, their businesses over the long term.
In 2023, the global insurance industry saw claims for natural catastrophes soar by 54% compared with the most recent 10-year average and by 115% compared with the most recent 30-year average. Premiums for primary insurance coverage are expected to rise steadily and steeply, with climate change projected to cause price increases of 30% to 60% by 2040 (excluding inflation); the share of catastrophe risk in property premiums is forecast to increase from 20% to about 30% during the same period.
Total loss assessments from climate and natural disasters in 2023 varied. Aon put global economic losses from 398 global natural disasters at $380 billion, with insured losses hitting $118 billion, driven by significant earthquakes and severe convective storms in the United States and Europe. New data from Munich Re assessed the total losses at $250 billion, with insured global losses of $95 billion. Most of last year’s losses were not the result of mega-disasters, but from many severe, regional thunderstorms, with assets worth $66 billion destroyed in North America, $50 billion of which was insured, and assets worth $10 billion destroyed in Europe, $8 billion of which was insured. The costliest natural disasters, according to Munich Re, were the earthquakes in southeast Turkey and Syria ($50 billion in losses), Typhoon Doksuri in China ($25 billion), and Hurricane Otis on the west coast of Mexico ($12 billion).
Despite two consecutive years of funding declines, NTT Data Group’s “Insurtech Global Outlook 2024” suggests that one wave of innovation specifically targeting emerging risks in the insurance industry—climate change, cyber risk and misinformation—could yield new insurance models and products. While artificial intelligence (AI) is improving climate risk prediction and mitigation, the combined impact of AI-based analytics, data science, smart sensors, radar and satellite imagery, and blockchain technologies on parametric insurance could represent the future of insurtech. Parametric insurance’s “if-then” model is triggered by real-time data describing the climate disaster or severe weather event—such as wind speed reaching predetermined levels for hurricanes, or the amount of rainfall for droughts or floods—and allows for faster claim payouts based on predefined, measurable parameters. Loss assessment is not required prior to claim payment, and claims are paid based on the event itself, not actual losses. While parametric insurance is not new, technology advancements are making it more attractive to address, quantify and respond to emerging climate risks. It can be integrated in parallel with traditional insurance models, embedded into parts of them, or exist as a standalone product.
The global parametric insurance market was valued at $11.7 billion in 2021 and is projected to reach $29.3 billion by 2031, increasing at a compound annual growth rate of 9.9% from 2022 to 2031. Parametric insurtechs like FloodFlash, Exante, Arbol, Safehub, Descartes Underwriting, Jumpstart, Parachute, Raincoat, Skyline Partners, and Reask use a range of AI analytics, data science, radar and satellite imagery, and sensor technologies to bridge the “protection gap” in traditional insurance created by the increasing frequency and severity of climate events.
Startups specializing in parametric insurance raised more than $110 million across 17 deals in 2021, more than any previous year, according to PitchBook data. In January 2022, Descartes Underwriting raised $120 million in Series B funding. In June 2023, Raincoat extended its seed funding round, raising an additional $6.5 million and nearly doubling the total amount it raised; a number of other parametric startups also raised money, though 2023 funding was down from peak levels of 2021. Growing interest in parametric insurance, though, has market observers generally optimistic about 2024 innovations and targeted investments.
Some experts caution that basis risk is a potential downside to parametric insurance. “The economic losses of the insured policyholder could differ by any margin from the amount of coverage, or the insured could have losses without the parameter being triggered,” according to the National Association of Insurance Commissioners. As such, accurately structuring and pricing parametric insurance products requires deep knowledge of the exact exposures of the policyholder and careful selection of the appropriate parameter to fit those exposures. The availability of accurate and localized trigger data for a variety of climate risks is another issue. Some insurers are reluctant to take on more exposure to catastrophe risk through parametric insurance, which can increase the price of insurance capacity for catastrophe-prone areas.
A new benchmark report from U.K.-based ShareAction, “Insuring Disaster 2024,” highlights the perversity of insurance companies’ proximity to fossil fuels and their damaging effects on the planet. The report ranks 65 of the world’s largest insurers and their approaches to responsible investment and underwriting across property and casualty (P&C), life and health, and Lloyd’s of London managing agents. It isn’t pretty: Half of the 65 companies received a grade of E or F based on 30 key standards that assess their approach to climate change, biodiversity and social issues. Only seven insurers achieved a B mark, and no insurance company received an A grade.
Among P&C insurers, Chubb, Tokio Marine Holdings, American International Group, The People’s Insurance Company of China, Traveler’s, and Liberty Mutual all received Es, while Nationwide Mutual Insurance, Sony Financial Group and Lloyd’s of London received Fs. Only three P&C insurers—AXA, Allianz GE and Aviva PLC—earned a B. On the life and health insurance front, Lincoln National Corp, Prudential Financial, New York Life Insurance, Principal Financial Group, and Northwestern Mutual Life Insurance all scored an E grade, while China Life Insurance and Protective Life Insurance earned Fs. Meanwhile, CNP Assurances, Legal & General Group PLC and Nippon Life Insurance all received B marks. Of Lloyd’s of London managing agents, only AXA XL Underwriting Agencies received a B, four agents received an E and six were given an F.
Only two companies achieved better than half of the available points in the survey: AXA Group earned 52% of points in the property and casualty category, while CNP Assurances received 51% in the life and health category. Despite overall poor performance, European insurers fared “significantly better” than their Asian and North American peers.
The ShareAction report found that fewer than 25% of insurers have “adequate interim targets” for 2030 or “robust” climate change transition plans covering either investment or underwriting, undermining the credibility of their net-zero commitments. The reason: Their policies still allow for coal, unconventional oil and gas, and new conventional oil and gas projects to be underwritten and invested in. Further, the restrictions that do exist have “side door” exceptions that allow fossil fuel companies to access investment and underwriting. While many insurers have conducted climate-related scenario analysis, more than a third haven’t used the results to reframe their approach to underwriting.
In terms of biodiversity risk, 43% of insurers, including all North American property and casualty insurers, received zero points for biodiversity underwriting; on the investment front, only one U.S. insurer—MetLife—scored more than 3% of points. They didn’t fare much better on governance: Most insurers did not report specific board expertise on climate change or biodiversity, suggesting insufficient oversight of these risks to their own balance sheets (never mind to people and planet). Almost half don’t set formal expectations for external asset managers regarding responsible investment, and even fewer take an active approach to holding their asset managers accountable.
Looked at by theme, insurers’ median performance was low: climate change - investment (28%), climate change - underwriting (26.7%), net-zero targets (18.1%), biodiversity - investment (13.2%), biodiversity - underwriting (8.3%), social - investment (28.5%), social - underwriting (14.6%), and governance and engagement (16.7%).
At this rate, the insurance industry could benefit from greater disruption by and partnership with climate risk-focused insurtechs that are neither wedded to the near-term appeal of fossil fuel interests, nor buckling under mounting losses resulting from climate change and severe weather events.
Opinion: Guest Essay
Navigating Regulatory Hurdles: The Case for SEC Approval of Ethereum ETFs
The complex intersection of cryptocurrencies as a new asset class and regulation within the financial markets has presented unprecedented opportunities and significant challenges. The debate around the SEC approval of Ethereum exchange-traded funds captures the broader struggle to reconcile the fast-paced evolution of digital assets with the measured pace of regulatory oversight—and what’s at stake for both sides.
By Bill Qian
Chair of crypto investment firm Cypher Capital and former Binance Labs executive
The U.S. Securities and Exchange Commission’s (SEC) cautious stance on Ethereum exchange-traded funds (ETFs) stems from the cryptocurrency market’s inherent characteristics. As a nascent and rapidly evolving sector, cryptocurrencies bring unprecedented volatility and uncertainty compared to traditional markets. This volatility, alongside unique digital asset risks, necessitates careful regulation to safeguard investors and market integrity. Furthermore, the current regulatory framework, tailored for traditional instruments, faces challenges in accommodating cryptocurrencies’ distinct nature, complicating the SEC's risk assessment and mitigation efforts.
A particular concern for the SEC is the potential for market manipulation and fraud within the cryptocurrency ecosystem. The decentralized and largely unregulated nature of crypto exchanges makes it more difficult to ensure fair trading practices and protect investors from deceptive activities. The SEC’s apprehensions are not unfounded, given the opacity and potential for price manipulation in these exchanges, which complicates the approval process for Ethereum ETFs.
Despite these legitimate concerns, the benefits of approving Ethereum ETFs are compelling. The introduction of such ETFs would represent a significant milestone in making one of the leading cryptocurrencies, Ethereum, accessible to a wider audience through a regulated investment vehicle. ETFs, known for their diversification and liquidity advantages, would provide institutional and individual investors a more familiar and regulated means to gain exposure to Ethereum, potentially attracting those who have been hesitant to dive into the complexities of cryptocurrency exchanges.
The approval of Ethereum ETFs would mark the onset of the altcoin season, especially since Bitcoin currently dominates the market, indicating that the altcoin season has yet to begin. Such an approval could position Ethereum as the quarter’s must-have asset, potentially elevating its price beyond $5k. This effect would mirror the significant impact observed with the Bitcoin ETFs, which notably allowed Bitcoin to exceed its pre-halving all-time high, a historical first. In a similar vein, should the Ethereum ETFs be approved, it is expected that Ethereum would swiftly surpass its previous peak prices within a month of the approval, thereby establishing a new benchmark for Ethereum's market achievements.
Even more, Ethereum ETFs could play a crucial role in enhancing market efficiency and facilitating better price discovery. Currently, investors seeking exposure to Ethereum are limited to direct purchases through crypto exchanges, which can be daunting for those unfamiliar with the crypto market. An Ethereum ETF would create a regulated, standardized market environment, increasing liquidity and enabling more accurate and transparent pricing of Ethereum.
Beyond these immediate benefits, the approval of Ethereum ETFs could have broader implications for the crypto market and regulatory frameworks. It would signal a recognition of the maturity and significance of cryptocurrencies as a legitimate asset class, encouraging further institutional investment and potentially spurring innovation in financial products and services. Moreover, it could serve as a catalyst for the development of a more comprehensive regulatory framework tailored to digital assets, addressing the unique challenges they pose while fostering an environment conducive to their growth.
Achieving these benefits, however, requires navigating the complex landscape of investor protection concerns. The transformative potential of Ethereum and blockchain technology underscores the need for a regulatory approach that safeguards investors and encourages innovation. A well-regulated ETF market could offer a solution, providing a secure and transparent platform for cryptocurrency investment that minimizes risks for investors.
The SEC’s reluctance to approve Ethereum ETFs reflects broader challenges faced by regulatory bodies in adapting to the rapidly evolving landscape of digital assets. While the concerns regarding investor protection and market integrity are valid, the potential advantages of Ethereum ETFs for the broader financial ecosystem are undeniable. These ETFs could not only democratize access to cryptocurrency investment but also enhance market stability and transparency.
To move ahead, a collaborative effort among regulators, industry participants and investors is required to develop a balanced and forward-looking regulatory framework. Such a framework should strive to protect investors and maintain market integrity while also accommodating the innovative potential of cryptocurrencies and blockchain technology.
The advantages of Ethereum ETFs—wider investor access, market efficiency and legitimizing cryptocurrencies—make a compelling case for SEC approval and could be a crucial step toward integrating digital assets into the global financial system. Beyond broadening investor bases, Ethereum ETFs, though not a complete solution, mark a vital move toward financial inclusivity by boosting trust in digital assets, fostering infrastructure, revolutionizing product offerings and addressing regulatory hurdles. Their impact relies on wider ecosystem efforts, necessitating collaboration across governments, private sectors, and communities to unlock digital assets' full inclusivity potential. Significantly, the emergence of digital assets as a new asset class signifies a once-in-centuries shift with the power to transform global asset management, currency, and technology sectors, reinforcing the transformative impact of Ethereum ETFs.
Interested in writing an Opinion Guest Essay for FIN? Submit a short author bio and fintech topic to be considered to holly@finnewsletter.com.
Noted & Noteworthy
There’s U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler, and then there’s SEC Commissioner Hester Peirce, who has the dubious distinction of being known as “Crypto Mom” for her pro-crypto and blockchain stance (technically, she’s pro-innovation). Her very public position on the agency’s errant enforcement actions against crypto companies, and her desire to see the agency be “tested” by how it responds to innovation have given Peirce a high profile in recent years. In blunt terms, Peirce sees some of the SEC’s actions as regulatory overreach, notably how U.S.-based crypto exchanges like Coinbase, Binance, and Kraken operate and whether Ethereum ETFs should be approved, the effects of which could have a negative impact by stripping market participants of their rights and slowing innovation. In a recent CoinDesk interview, Peirce expands on her belief that “it’s a fundamental American principle that people are free to make choices,” and that it’s not the job of the government to stand in the way of those decisions by being too “prescriptive” in its rulemaking. Some of the highlights of the interview include:
Her differences of opinion with Gensler: “I have the view that I don’t necessarily know what’s best for other people.”
Poor regulatory design that led to big banks making the same mistakes in the run up to the financial crisis: “One way to address that is to build resilience into the system, and having heterogeneity in the system is a good way to build resilience. There are some interesting concepts within crypto that allow for more decentralization of the financial system.”
Decentralized finance as the future of the financial system: “My prediction would be not; people want to deal with a centralized intermediary. But I think that there will be a role for decentralized finance.”
On Prometheum, the only U.S.-registered, SEC-compliant crypto platform, as a fair-haired crypto child: “I'm not going to speak to any particular entity. Nice try.”
Since her Safe Harbor proposal, the need for decentralization over a longer timeline: “Again, decentralization is not an end in itself. It is the right thing in certain circumstances. …But we can't even really have these conversations at the SEC right now because the conclusion is just to apply exactly the same rules that apply to stocks and be done with it—and I just don't think that works. But just taking a step back and thinking about what we're really trying to solve might take some pressure off the decentralization question.”
Seen and Heard…
It’s either going to be a very good year for Bitcoin or the beginning of the end, according to a new survey from Deutsche Bank. The glass-half-full, glass-half-empty thinking breaks out like this: Just over 10% of 3,600 respondents expect Bitcoin to surpass $75,000 by year end, while one third think its price will slip below $20,000. Forty percent of those surveyed see Bitcoin flourishing over the next few years, but 38% of respondents think Bitcoin will disappear entirely at some point, Bloomberg reported, also noting that Bitcoin is up 67% this year, besting traditional assets like global stocks and gold. Well, that settles things. …Uniswap Labs, the developer of the automated ethereum-based decentralized crypto exchange, revealed that the SEC has served it with a Wells notice, indicating that it will likely face an enforcement action from the agency. The U.S.-based exchange—a driving force behind decentralized finance (DeFi) through its three Uniswap protocols that allow cryptocurrencies to be traded on the Ethereum blockchain without an intermediary—intends to fight the lawsuit. More than $6 billion is deposited on Uniswap’s various protocols, accounting for between $1 billion and $3 billion of daily trading volume, according to Axios. Upon news of the looming enforcement action, Uniswap’s token, UNI, was reportedly down 17%. …And not to be overlooked: With the Bitcoin halving looming, crypto miners could sustain a $10 billion hit to revenue, based on Bitcoin’s current price, as per Bloomberg. U.S.-listed miners comprise about 20% of the sector’s computing power, while private miners make up the balance and face greater vulnerability post-halving as they are more reliant on debt financing or venture capital to cover funding gaps, versus public companies that sell shares to raise funding. …Fintech-related systemic risks and the vulnerabilities they pose to financial systems are examined in law firm Baker McKenzie’s “Fintech and Financial Stability: Weighing the Interconnected Risks Technology Poses to Financial Systems,” the final segment in its The Next Decade in Fintech series led by Karen Man, partner in the firm’s financial services regulatory practices. The threats include cyber security risks tied to financial institutions’ dependence on a limited number of big cloud service providers; big tech data ownership; bank disintermediation from digital currency transactions; excessive risk-taking on the part of digital-only neobanks’ lending and liquidity management; and “black swan” events, or the unintended and unforeseen consequences of advanced innovation, such as the speed with which digital transactions can occur. (Digital-led bank runs such as that experienced by Silicon Valley Bank and others come to mind.) It also focuses on technology-induced destabilizing factors such as contagion risk from crypto assets like stablecoins, artificial intelligence-enabled cybercrime, and the disconnect between regulation and the pace fintech innovation. What shores up the risks faced by financial systems: innovation by systemically important financial institutions and the rise and impact of regtech to prevent history from repeating itself in the financial industry. …The 2024 Fintech Innovation Lab New York program, founded and run by Accenture and the Partnership Fund for New York City and now in its 14th year, announced the 10 early- and growth-stage fintech companies from a field of more than 250 applicants globally that will participate in the 12-week program that begins this month. With most deploying AI as part of their fintech product, this year’s participating companies are Addition Wealth, a financial wellness platform targeting financial inclusivity; Alt/Finance, an AI-powered alternative investment platform for luxury collectibles; Boss Insights, an open finance data and AI-based insights provider to help financial institutions and fintechs qualify and support business clients at scale; DynamoFL, a company that enables privacy, security, and compliance guardrails to be embedded into generative AI applications to comply with emerging regulations; Hyperplane, a data intelligence platform that allows financial institutions to develop personalized experiences and predictive models through proprietary large language models; LastMile AI, a developer tooling platform that helps software engineers build generative AI applications; Muse, an API-based platform that provides financial institutions with custom, scenario-based tax and financial insights for their clients; Qumis, an assistive-AI platform that can quickly analyze insurance policies and pull relevant claims, brokering and compliance information; Reality Defender, a cybersecurity platform that detects fraudulent AI-generated audio, images, video and text to defraud banks and insurance companies; and Stacklet, a cloud governance as code platform for companies to manage security, asset visibility, operations and cost optimization policies in the cloud. Since its founding, the FinTech Innovation Lab New York has worked with founders from 109 fintech companies—27 of which have since been acquired—that have created more than 3,000 jobs and raised more than $2.6 billion in venture funding.
FINvestments
🦈 Number of the Week: Linqto, a U.S.-based digital private market investment platform, is set to go public via a $700 million special purpose acquisition company (SPAC) merger with Blockchain Coinvestors Acquisition Corporation 1 (BCSA). The company, with more than 750,000 users in 110 countries, allows investors to make investments in unicorns and other private mid- and late-stage tech companies, particularly in the fintech, blockchain and auto sectors (think Chainalysis, Stripe, Circle, ConsenSys, DailyPay and Ripple, for example). After the transaction, the company will become a wholly owned subsidiary of BCSA, but will operate under the Linqto brand. Its outstanding common equity will be cancelled; shareholders will receive shares in BCSA at an implied enterprise value of around $700 million.
🦈 London-based Mimo, founded in 2023 with the goal of consolidating, automating and streamlining payments, cashflow and inbound financial management for small and medium-sized businesses, has launched its new platform with £15.5 million (US$19.3 million) in funding. In addition to its accounts payable and receivable tools, the startup’s “Mimo Flex” product also extends customers a pre-approved line of credit. The round was led by Northzone, with participation from Cocoa Ventures, Seedcamp and Upfin VC, among others.
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