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AM Best’s Inaugural Student Challenge Leads to Innovative Solutions for Catastrophe Risk

This year’s winning team created a parametric insurance solution that helps families during emergency evacuations.
  • Lori Chordas
  • May 2021
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University of Wisconsin-Madison graduate students Andrew Shaw and Madison Wescott have won AM Best's inaugural Student Challenge, which tasked risk management and insurance students from around the nation with creating innovative solutions for catastrophe risk.

Their winning submission, “Emergency Evacuation Assistance,” is a parametric insurance solution that helps low-income families pay expenses related to an emergency evacuation during a catastrophic event.

Andrew Shaw University of Wisconsin-Madison

Although evacuating on such short notice can be an inconvenience for some, it is nearly impossible for many who suffer from financial insecurities.

Andrew Shaw
University of Wisconsin-Madison

The winning duo, who received half of the overall votes cast for the top three finalists, “brought an interesting perspective on the funding of liquidity and economic loss from emergency evacuations,” said Matthew C. Mosher, president and CEO of AM Best Rating Services.

Shaw and Wescott were among three finalists who presented their risk solutions at the 28th Review &Preview Conference—AM Best's invitation-only gathering of top-tier insurance executives. Conference attendees of this year's event, which was held virtually on March 15-17, voted on the Student Challenge winner.

The challenge is designed to support efforts by AM Best and the industry to develop and attract talented students to the insurance and risk management sector, Mosher said. While the competition was open to undergraduate and graduate students who could submit as individuals or two-member teams, this year's top three are graduate students at their universities.

Colin Lane and Kohta Kumazaki, also from the University of Wisconsin-Madison, developed “Localized Parametric Insurance Technology,” which proposes using highly localized weather data to accurately assess basis risk for parametric crop insurance.

Madison Wescott University of Wisconsin-Madison

Madison Wescott
University of Wisconsin-Madison

Mohammad Soltani-Nejad of St. John's University presented “Contingent Pandemic-Response Investment Instrument,” a capital markets solution for pandemic risk that uses tradable securities and contingent capital to fund the development of pandemic vaccines and therapies.

The overall competition included three rounds. All entrants submitted an abstract, and each of the entrants who advanced to the second round presented a 25- to 30-minute video detailing their solution. Three finalists were then paired with senior members of AM Best's analytic team who mentored them through the final phase of the competition, said Andrea Keenan, executive vice president and chief strategy officer at AM Best. Keenan announced the winners on March 17.

Colin Lane University of Wisconsin-Madison

Parametric insurance is common in today’s agriculture sector. But parametric policies “tend to have problems in basis risk, whereby the proxy that we’re using to measure the weather phenomena is too distant from the field that we’re trying to insure.”

Colin Lane
University of Wisconsin-Madison

Emergency Response

Catastrophes of all types have been grabbing headlines because of the widespread destruction and costly losses often left in their wake. Last year alone saw an unprecedented 22 billion-dollar disasters in the U.S., including wildfires, droughts and heat waves, tornadoes, tropical cyclones, hail storms and a derecho, according to the National Oceanic and Atmospheric Administration's National Centers for Environmental Information.

Given the rising frequency and severity of those events, AM Best sought to focus its inaugural student competition on risk solutions designed to insure against natural and human-caused calamities such as pandemics, hurricanes, floods, and industrial and nuclear perils. Solutions could take any form—from new products to public-private partnership or alternative risk transfer instruments.

“When natural disasters strike, such as hurricanes, floods or wildfires, we all know that a speedy evacuation is key to saving the most lives,” said Shaw. He and Wescott were mentored by AM Best Director Michelle Baurkot.

“Although evacuating on such short notice can be an inconvenience for some, it is nearly impossible for many who suffer from financial insecurities,” Shaw said, pointing out a Federal Reserve report that indicates nearly one-third of Americans fall into the latter group.

“We looked at the five states that were the most likely to get flood damage and realized that 15 million people are uninsured and in poverty in those five states alone,” Wescott added.

The duo sought to assist individuals facing those hardships in all locales by creating a parametric solution that triggers an insurance payout when an emergency evacuation is declared by county or state government, automatically distributing funds to policyholders and allowing them to quickly leave their homes.

Kohta Kumazaki University of Wisconsin-Madison

Kohta Kumazaki
University of Wisconsin-Madison

Policyholders would pay a small fee for the policy, which would be well-suited for backing by the Federal Emergency Management Agency, Shaw and Wescott said. The solution would be distributed by private insurers.

“Since we were developing a public-private partnership, we knew that we needed to find efficiencies which made the product beneficial for both parties. The parametric insurance product allows for many efficiencies, especially within the claims management process,” Shaw said.

While Mother Nature's wrath can wreak havoc and costly losses on homes, businesses and autos, natural catastrophes can also significantly impact local agriculture. Kumazaki and Lane created a solution to help those impacted by that risk, while also improving food security and increasing crop insurance penetration in the U.S. from the current 80% to “about 100% by covering crops that existing crop insurances cannot insure,” said Kumazaki.

Parametric insurance is common in today's agriculture sector. But, Lane said, parametric policies “tend to have problems in basis risk, whereby the proxy that we're using to measure the weather phenomena is too distant from the field that we're trying to insure.” He and Kumazaki proposed the use of a technological device, such as an insurer-provided pole placed in a farmer's field to measure wind and rainfall at field level, and collect data to trigger the insurance policies.

Unlike traditional insurance, Kumazaki said, the product doesn't require the use of claims adjusters, “so farmers can receive fast and efficient payouts.”

The duo said they plan to partner with biotechnology research institutes, which can use the data to breed crops suitable for the local climate, and logistics companies that will utilize the data to predict crop yield so they can efficiently allocate their fleet and reduce operating costs.

In addition, Kumazaki said, “Localized data will realize efficient pricing, and cutting-edge technologies are automating claims adjusting and payout processes. These advances will help policyholders in the form of lower premiums. Also, the localized data will realize detailed coverage that existing parametric insurance cannot provide. Therefore, our product will significantly reduce base risk.”

Mohammad Soltani-Nejad St. John’s University

Instead of having donations to cover all the proceeds and financing requirements, we can just use them for paying premiums, and the proceeds of the instruments will be used for financing the pool of the vaccine developers that are now backed by those multinational institutions.

Mohammad Soltani-Nejad
St. John’s University

New Concerns

Natural catastrophes weren't the only disasters to hit insurers across the globe this past year.

The COVID-19 pandemic created trillions of dollars in losses for the global economy and billions in losses for the insurance industry, said Soltani-Nejad of St. John's University.

Adding to the challenge is that pandemics are largely not insurable. But industry experts say there are ways the sector can address those perils, including supporting pandemic response through financial instruments. Soltani-Nejad's solution addresses the funding of pandemic exposure and the importance of response time to limit economic loss.

“The recent experience showed us that the insurance industry doesn't have the capacity to absorb losses of a pandemic. Investing in and insuring the pandemic generally is not a smart investment,” he said. His solution would enable the private sector and insurance industry to, “instead of insuring the pandemic,” finance the most effective instruments to end it: vaccines and therapeutics.

The first part of his two-form solution is “basically an ILS structure” similar to a cat bond that uses the proceeds to finance vaccine development and support global vaccine developers, he said.

The second instrument is contingent capital, which Soltani-Nejad said is much like “contingent capital facilities used by reinsurers and insurers around the world.”

“In that case, pharma companies that have a platform for vaccine and therapeutic development can tap into this structure and use it to have access to immediate capital when they need it most after a pandemic unravels,” he said.

Soltani-Nejad said funding for his solution would likely come from hedge funds and ILS-dedicated funds that typically invest in cat bonds. Investors would receive premium and coupons financed by donations that “agencies and multinational institutions have access to.”

“Instead of having donations to cover all the proceeds and financing requirements, we can just use them for paying premiums, and the proceeds of the instruments will be used for financing the pool of the vaccine developers that are now backed by those multinational institutions,” he said.

The discovery of a dangerous pathogen would be an example of a “triggering event, meaning if the company has a platform for vaccine development for that specific pathogen, it would call on committed capital and use that capital to fund its research and development expenses,” Soltani-Nejad explained.

Future Leaders

AM Best's Mosher said he was impressed by the level of creativity and innovation among risk management and insurance students who participated in the inaugural Student Challenge, which was sponsored by the AM Best Foundation. The foundation was created in 2018 to financially support charitable organizations that encourage education and thought leadership in insurance and risk management.

“These submissions were all well-thought-out,” he said. “There is a lot of young talent out there. We saw that in this competition.

“Risk management programs have really done a lot for the professional development of their students and their understanding of the industry,” Mosher added. “They're prepared for the business world.”


Lori Chordas is a senior associate editor. She can be reached at lori.chordas@ambest.com.


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