Index coverage is the newest product offered by the Aquaculture Insurance Exchange. This insurance is aimed towards offering protection on a quantifiable peril by establishing a specific pay schedule based on historical data. It offers very precise security for the applicant at a competitive rate, ideal for those looking for similar security offered by Named Peril Coverage; however, with a payout structure correlative to actual losses, coverage can be offered at a very reasonable rate.
An example of this type of coverage shows its advantages most clearly. A land based facility utilizing ponds for shrimp culture is at risk of flood in severe rainfall. The greater the amount of rainfall, the more damage and loss the farm can experience. Index coverage offers the most beneficial coverage in this scenario: it offers coverage of the peril through a structured payout that correlates to actual loss, allowing for a more competitive rate.
The facility completes an insurance application form, providing detailed background information, including farm location, stock amount and value, and the value of that stock they want to insure, i.e., the limit of liability. The farm may carry a stock valued at $3 million USD but only wishes to purchase coverage with a limit of liability of $1.5 million USD, for example. This depends on the applicant’s budget.
Between the applicant and the insurer, a discussion of triggers, or points at which coverage will pay for losses experienced, are discussed; with that, a payout structure can be determined. The insurer assesses independent historical data to inspect actual loss history of the farmer in relationship to the peril’s statistics. For example, the applicant wants initial trigger to be rain in excess of 10cm in 24 hours as this is the point at which loss of stock occurs. Therefore, applicant and insurer come up with a payout structure that most closely correlates with what may be the actual loss the farmer would incur in this situation:
10cm = 10% of Limit of Liability
15cm = 20% of Limit of Liability
20cm = 25% of Limit of Liability
Structure would be established up to the Limit of Liability. The insurer will then complete an assessment of historical data, looking at actual loss history from the client and independent rainfall statistics for the location of the farm, e.g., daily rainfall statistics from the local WMO weather station and/or satellite data, etc. This will show whether the payout structure does, in fact, closely resemble actual losses as well as the frequency with which this event may occur. The insurer can then assess risk and develop the cost to insure this event.
Because the structure of payout is more detailed and correlative with actual losses that might occur, there is less risk to the insurer, meaning the farmer can benefit from a reduced premium rate. The more sophisticated payout structure, the more benefit this insurance has to both parties in terms of protecting against actual loss as well as keeping cost of coverage low.
Availability of independent historic data is required to obtain index cover of a specific peril (ex, weather data from a real-time recording station). In the US, this information is, in most cases, readily available through many potential data sources, including but not limited to government and commercial providers/recorders as well as satellite collection points; however, as a general rule, a complete data set stretching back 15 years is required, with the longer the data set the better.
As it specifically relates to Index cover, points at which the insured peril causes actual losses must be established with the applicant using the historical information required so that a detailed scale of payout can be established to cover those losses. The more complete the payout structure, the better actual loss coverage it will provide the applicant in the case of an event as well as better understanding of what is covered, reduced risk of suffering a loss without compensation, and improved chance for reasonable coverage rates.