Assembly Standing Committee on Insurance

Welcome to the Assembly Insurance Committee informational hearing on parametric insurance. California continues to face extreme weather, and we are undoubtedly feeling the effects of climate change. I think right now we're in October and we've seen 100 degree temperatures already. So this is kind of our new normal. Recovering from extreme weather events can be costly, even if you have insurance. And more often than not, traditional insurance policies don't cover all of the costs associated with these extreme events. At this hearing, we're going to take a closer look at parametric insurance.

Parametric insurance policies offer an innovative option to help address these protection gaps in disaster coverage and can also provide coverage for more difficult to insure risks. Today, we hope to learn more about what parametric insurance is, how it works and to what extent it is already available and being used, and how it can serve as an additional tool to aid in disaster recovery and possibly compliment traditional insurance policies. Insurance Commissioner Ricardo Lara will also be joining us today. Welcome.

And he's going to provide more details about the role parametric insurance can have in California. I'd like to thank the Members that will be here in attendance with me today and provide them an opportunity to make opening remarks. And additionally, we're going to have an opportunity for Members to ask questions following each of our three panels. So, Insurance Commissioner Lara, you're our first panelist, and I know this is a subject of great interest to you.

And I really appreciate you flying up to be here today. And I just want to make a quick. Oh, we have another Member. I just want to make a quick note that Mike Peterson will also be joining you today. He's your Deputy Commissioner at the California Department of Insurance, Climate and Sustainability Branch. Welcome, Assemblymember Valencia. Without further ado, whenever you're ready, Insurance Commissioner, please go ahead.

Thank you, Madam Chair and Members. Thank you for hosting this informational hearing today on a topic that I find incredibly interesting and demonstrates that insurance has the capability of being innovative and actually cutting edge. Understanding the potential of these products by showcasing how they are being used around the world to close insurance gaps, safeguard our most vulnerable communities, as well as protecting our environment, can provide us with clear examples of how ... we may implement and oversee these products in California one day.

As we finalize the reforms in my Sustainable Insurance Strategy to address our insurance crisis and the ongoing availability challenges, we also need to recognize that climate risk in California go well beyond wildfire, unfortunately. At our Department, we recognize the scope of our protection gaps for flooding, sea level rise, drought, extreme temperatures, including extreme heat.

And let me say that this on the onset, parametric insurance is not a replacement of traditional insurance products. Traditional insurance products remain the best way Californians can protect their assets and their families. But we're also realistic. You know, cost of living, lack of housing, inflation, need for livable wages. All of this contributes to consumers either forgoing coverage or obtaining minimal coverage, leaving many extremely vulnerable to the elements. Around the world, we see examples of insurance that is focused on specific local threats.

Many are the first of their kind, and countries are overseeing creative new approaches. This is where parametric products can play a pivotal role and become an additional tool to expand coverage to vulnerable communities in various regions throughout our state. Some are also narrowly tailored to to unique challenges facing endangered workers, for example, and being used to protect critical ecosystems.

Proving that insurance can be used as an important instrument in our fight against climate change. Understanding and building expertise in the various perils and gaps, as well as understanding the innovations in the insurance industry, will only benefit California's consumers through stronger protections and can also help us increase the take up in coverage that continues to lag behind. And let me bring one of those issues to point. In fact, less than 2% of households in California have flood insurance coverage.

This is a colossal problem we are trying to solve nationally as well, where only 4% of Americans, American households have flood insurance policy. As you know, this leaves thousands dependent on State and Federal Government assistance to rebuild, recover, and to ultimately survive. Extreme heat events, which continue to increase in our state, produce costs that are rarely insured. And we are barely in the inception of really understanding the impact to our health, life and PNC insurance markets.

Earlier this summer, my Department released the first ever extreme heat report, uninsured and uninsured losses. I think we provided a copy. We have copies of those with us today. And from our - and this is just a study from recent heat events, providing critical information to us as regulators on the financial risk insolvency that can come from extreme heat events. So we need innovative solutions to close these gaps at the state, national and international scale. And that is where I want to start my presentation today.

And hopefully I get this right, because I'm a Gen X-er, so. Oh, see, I already screwed that up. Okay. In 2019, I launched the first of its kind California Insurance Working Group, jump starting two years of collaborative work by 18 group members from environmental, insurance, and public policy organizations to develop recommendations that identified new strategies to reduce the risk of climate impacts for California communities.

You'll be hearing from one of our amazing group members, Lloyd Dixon, at this hearing a little later. In 2021, the working group published recommendations in our climate insurance report titled 'Protecting Communities, Preserving Nature, and Building Resiliency'. The report recognized the importance of nature based solutions, like our wetlands, to protect communities from flooding and urban tree canopies to protect neighborhoods from extreme heat. The recommendations break down the accelerating risk that we see in wildfire, flooding and extreme heat into five cross cutting themes. How do we assess the risk then?

How do we communicate that risk broadly so that people understand the severity of what we're about to face? And then how do we expand risk mitigation to invest in nature based solutions and innovative products so that we don't constantly go into the great infrastructure, which is much more costly, unsightly and much more difficult to repair. The report recommended that innovative insurance solutions could help close protection gaps and the Department should help catalyze new insurance concepts.

That innovation includes parametric insurance products, community insurance products, and inclusive insurance strategies that expand insurance to the most vulnerable populations. Parametric insurance policies are those where financial risk and insurance are tied to wind speed, for example, or extreme heat severity, or a number of inches of rain in a single area.

Community level insurance focuses on providing additional insurance for the entire community, which not only pulls the shared risk of a certain community, but it can also be used to provide financial incentives for community-wide risk reduction, especially nature based solutions. So in the next slide, you'll see regular insurance is about restoring property to its pre damaged state.

That's as we all know, that is indemnity insurance. With parametric insurance, the payout is determined by measuring the severity of the disaster. So extreme heat wave duration or intensity for example, or earthquake Richter scale measure, height of a river flood - height of a river above flood stage, for example. And of course during wildfire, we're looking at maybe acres burned or the amount of structure damage in a particular wildfire.

Again, this is not a replacement for indemnity based homeowners coverage, but parametric products can be flexible with, what I'm more excited about is, with direct cash payments without a lengthy claim process, the money is triggered to the specific metric we are using. So no questions asked, no claim process. The money is given if it meets the scale that we the measuring that we're going to use.

So parametric insurance can improve resilience in communities, providing a strategy for unexpected disaster costs, for example, such as evacuation, and by helping state and local governments fund their own recoveries, including infrastructure rebuilding. These policies often cover non property losses such as health impacts from heat waves or floods or business interruption, for example, that we experienced during COVID.

It can help businesses and governments prepare and respond. And again, the immediate payouts can assist with pre disaster preparation to fortify natural infrastructure and actually work on rapid recovery. So, to improve our own capacity to understand and overseeing emergency policies, we really have engaged regulators across the US with international regulators from every continent.

Environmental groups like the Environmental Defense Fund and Climate Resolve, to better understand how insurance policies can be used to protect vulnerable communities and at the same time, protect nature, which is, you'll be hearing some of the first of its kind examples of how that's happening. Insurance can no longer be an afterthought in our overall climate strategy.

As we all know. The innovative products you'll hear about today are examples of how insurance can actually be at the forefront of how we plan and prepare for climate change. And the challenge for this Committee and for its Members is to just for this hearing, break away from the traditional work that we do around insurance, from breaking away from the paradigm of rates, files and all the traditional work that we do.

This really gets us at an innovative space where I want you to be a little bit uncomfortable, actually. So the next slide you see, first and foremost, recent extreme heat income insurance in India that we've seen - is this. Wait. Okay, here we go. No, it's right. Extreme heat income in India. As an example. You have an article on your packet that is a great example of a creative program that goes beyond traditional markets. This is an initiative developed by a group called Climate Resilience for All, a group that I work with as a Member of the International Extreme Heat Resilience alliance.

So, in western India, temperatures create deadly hot working conditions for many workers. I know that sounds very familiar for us here in California. Extreme Heat Income Insurance was launched in 2023 to help women in India recover lost wages due to climate driven extreme heat events. The program is anticipated, is activated, I should say, at a threshold of extreme heat conditions aligned with temperatures expected to impact health outcomes. So they've been able to link both the health outcome to the actual gravity of the heat. So this past June, I'll show you some headlines.

More than 46,000 women received income insurance direct payments, improving - providing important stability and protection. So here, here are some of the articles about the impact of the new insurance program in protecting women during recent heat events. This is the type of insurance strategy that is getting more attention worldwide as climate continues to.

As our globe continues to heat. And that is because people are becoming protected and would have otherwise been exposed to extreme heat and potentially death because these women had to work no matter what. So now the question is, how do we scale and improve these type of programs for California? And that's what we are currently working on.

Let's talk about drought. Drought creates financial risks to food supplies and local economies. This insurance policy that I'm about to talk about is a bipartisan partnership between the World Bank and the countries of Djibouti, Ethiopia, Somalia and Kenya. When droughts occur, cattle don't have grass to eat. This policy prevents the death of cattle herds by detecting drought conditions and providing funds for herders to feed cattle through alternative food sources rather than grazing in the fields that have dried out and can actually kill your cattle.

Saving the cattle herds prevents communities from major loss in their, which is a major source of income, especially for small farmers. So these again are, it's a premium that the farmer pays, and if the insurance company determines that drought is coming, they measure it. They do direct payments so that the farmers can actually move their herd and move their cattle so that they won't be devastated. So we're also starting to see other US states innovate in this space by creating inclusive insurance pilots in partnership again with the Environmental Defense Fund and local community organizations.

In New York City, for example, they have a flood program, a flood parametric program for low and moderate income households. The rapid infusion of funds is intended to help address gaps and increase equity and recovery. When severe flooding triggers the policy, payment will quickly be sent to the Center for NYC Neighborhoods. Then the center will use those funds to activate an assistance program of emergency cash grants to cover immediate post flood needs while households wait for other forms of assistance that take longer. This is crucial.

We want to make sure everybody has a minimum level of coverage and people are not forced to live in their inundated home, which create additional health hazards and conditions for our most vulnerable folks. So the cash infusion helps everybody be able to evacuate quickly. So let's talk about these types of policies can also help governments collaborate across jurisdictions. And this is where we're starting to see insurance policies being taken up to actually protect natural infrastructure. In the Caribbean, where hurricanes and earthquakes can be devastating to the health and economy, the economic security of local communities.

Multiple countries facing hurricane risk in the Caribbean have a parametric strategy for at least the past nine years, I would say, based on hurricane severity,. The program has been triggered multiple times, providing more financial security to these prone - to these risk prone areas, again allowing them to access capital quickly to aid in the recovery much quicker.

We all know that nature based solutions are critical to our climate resilience. To protect our most vulnerable communities. We need wetlands and floodplains, healthy forests and urban green spaces to mitigate the climate impacts we are facing. So. In 2018, local businesses in Quintana Roo, Mexico invested in the first of its kind insurance policy for the local coral reefs. Coral reefs act as a natural buffer, as we all know, to the wind and the waves from large severe storms like hurricanes.

So the coral reefs in Quintana Roo are also a major component of the local economy. When the coral reefs are damaged, there is a limited amount of time to repair them. The parametric policy provides a fast infusion of funds to restore the coral reef and allow local communities and businesses to activate their evacuation and recovery plans. So what are we doing here in the US? We're starting to see now, a couple years ago, Hawaii became the first state to ensure substantial portions of their coral reef, again providing quick access to funds for repairing the reefs after large storms.

This type of strategy, ensuring natural infrastructure, is being tested in other areas with coral reefs and other endangered ecosystems. Puerto Rico now has also engaged in this type of insurance product. And we are examining the performance and the applicability to California natural assets here, like our sand dudes, urban forest, as well as envisioning the potential of covering community wide mitigation actions which are critical to our ongoing challenges with wildfires.

So our goal here is to understand the risks, understand new insurance strategies and reduce protection gaps. We want more people covered, obviously not less. Parametric insurance is one tool in the toolbox, and it is one that my Department is learning more about building our expertise as a regulator so that we can pursue thoughtful oversight, implementation and actual scalability, given that we are such a large market. In California, there is a potential for parametric insurance, community insurance and inclusive insurance to protect more people.

This includes potentially protecting farmworkers, sidewalk vendors, warehouse workers, outdoor workers and extreme heat during extreme from extreme heat through extreme heat income insurance similar to what we saw in India. Improving resilience in vulnerable communities facing atmospheric river flooding and possibly providing minimal leverage of insurance protection so that the entire community can evacuate and have access to shelter.

This would have been critical in Pajaro and in San Diego County during their massive floods. Protecting our coastal areas from storm surge. In California, we don't have extensive reefs like Hawaii or Puerto Rico, and we don't have mangroves, but we have coastal marshes and floodplains that help protect our communities.

There are opportunities to think creatively to better protect Californians and communities like Imperial Beach in San Diego, which continues to flood repeatedly during King tides. So we are engaging with scientists, with other insurance commissioners and regulators from around the world to better oversee and understand the use of and practicality of these products. So, as I close, I want to again emphasize this is a growing area where insurance can go further to close these gaps, help fight against climate degradation, provide more inclusive recovery options, and of course, help governments better manage our growing risks.

And as we work to develop these new insurance instruments and continue to work with environmental groups, insurance industry and mitigation innovators, these new insurance tools can assist us in addressing the costliest and life threatening perils that we are currently facing and will undoubtedly face in the future. Look, California is a renowned innovator in combating climate change.

We all know that. We're all very proud of that and leading on environmental policy. We now see how insurance touches every aspect of our lives, and it's time for us to start working on all these innovations that we should be leading on and not allowing other jurisdictions to lead, given the fact that we are the largest market in the country, fourth in the world.

And again, you don't rethink how we look at traditional insurance products. And I hope you enjoy this presentation. As a Chairwoman knows, this is an issue that I'm very passionate about and I appreciate your time and you're going to hear from great, great folks that are at the cutting edge of developing these products. So thank you for your time.

Thank you, Insurance Commissioner. I know how passionate you are about this. How large is the parametric insurance market in California right now?

So currently we don't have parametric products. We are looking at, as we're looking and investigating how we can create these products and looking at what regulations we would need to allow for these products to grow. This is just at the inception of our work, and we hope to be able to work on a regulation that will get us to allow for these products to flourish in California. Yeah, you're correct. There's some small products, but they're all in the surplus lines, which we know we don't regulate. So the goal here is to incentivize our domestics to start looking at these insurance products.

Which even during the conversations we've had, are starting to also look at - how can we be innovative? Because not being able to access insurance or not having an insurable marketplace is not an option. But we also need to assist them with additional tools like parametric to help us provide protections for our most vulnerable and for the homes that are most likely not going to be able to find in the traditional market insurance because of where they're located and the severity of these storms and climate events that we're living in.

Okay, great. And as these products become more available in California, do you see them as helping to close that protection gap and actually help with the insurance crisis?

Absolutely. You know, again, the goal here is to get as many people as possible insured. And one of the ways we think and the way we're looking at these parametric products is not selling Californians another policy or another product. Is working with local communities, with county governments, with the state Legislature to enter into these parametric products so that they plan accordingly to make sure that if a flooding event happens in their community, they can get quick access to cash, and then make sure that their evacuation is funded, that there's enough food, there's enough shelter.

Some states, like Oregon, for example, has a parametric product for their wildfire. So, beyond traditional homeowners, if the wildfire burns a certain amount of acres, they don't just sit on a pot of money waiting for the wildfire to do. And then we dump it. And then we put it. The Legislature come in, comes in and puts more money. They actually bought a statewide policy that is triggered through a parametric product where they're actually able to get not only more money than what they have in their pot. And the payouts in Oregon, they've had several payouts already. Right.

They've had the policy for about 40 years. So they've been working, and it's gotten more refined over time.

So this is, again, another example of us just not sitting in the money, making the money work for us by being able to draw from a parametric product, where, again, no questions asked, it meets the metric the money's released, which is the beauty about these products.

Yeah. So that brings me to my next question. How do you. How do you measure risk before something happens, like for a drought or extreme heat?

There is so much new, amazing technology around here. And this is where the way these products, I think, will first be established in California are going to be how they've been being established all over the world, Working with nonprofits, environmental groups, government agencies, similar to what I recall when I was here in the Legislature, when we were barely talking about the solar industry and creative incentives to get this done until the policy would mature and then be able to be sold on its own.

And some of these companies, some of these parts of the world already getting to that point. So it all depends. It all depends on the gravity of the issue and how we set up the parametric product. It can be again, with wildfire, it could be acres burned or it could be amount of structure damage. So it all depends on how we structure it, which is why we have very smart people in the Department now, climate scientists, that are working on what potential triggers, for example, sea level rise, what would be an appropriate trigger in California or extreme drought.

How do we measure how many drought days or how many extreme heat days by when we start then, potentially one of the things we're looking at in LA, for example, is at what point and how many days of extreme heat do we start - do we create a policy where maybe we pay out so that seniors can turn on their air conditioning? I mean, low income seniors don't turn on their air conditioning because they can't afford it. And so can the City of San Fernando, for example.

We create a pilot project where we release money so that their seniors can actually keep their air conditioning running so that they can keep themselves safe. So it all depends on how creative we want to be. It all depends how, what kind of triggers we work on. But it's really working with experts and scientists on our particular perils here in California that would help dictate what would be the triggers and what would be the appropriate measures and what would be an appropriate payout. Again, this is just another tool that we can use. And so we're barely in the inception of all this kind of innovation.

Thank you. I'm going to turn it over to my colleagues. Do you have any questions? Go ahead.

Thank you very much. Insurance Commissioner, for one, availing yourself and being a part of this conversation, I think it's absolutely important because certainly a lot of Californians are concerned about the insurance that they have and insurance that they're losing. What is the criteria, would you say that for this new product, what is the criteria that people have to meet in order to even leverage it?

Well, it would be more a criteria based on the actual catastrophic event. So the web of what we've seen is, you know, so if wind speeds get to a certain amount, a community gets, you know, a percentage of money. If it then it crosses to a next wind level, you get another pot of money. So you could do, it's all based on the catastrophe, on the earthquake, on the flood event. So it's not the community that has to meet, it's what the catastrophe is. And usually these products, and you'll hear some more examples, I envision it as a product that the City of Carson can enter into.

The City of Los Angeles could enter - large municipalities - to create community wide insurance protection programs because we all, because what we've seen is, again, like I said earlier, I don't want to replace traditional insurance. Indemnity insurance remains the best option for you and your family to protect yourself from flood, from fire, from earthquake.

But we still see that the take up in some of these products, given people's circumstances, the cost of living, inflation. Only 2% of Californians have flood insurance. So what about if we've had a parametric product for the community of Pajaro, for example, where if the water reached a certain level, that community would have gotten a payout immediately, and then everybody, that community, that city, townhall or county can then evacuate everybody.

So it's not only those with an insurance product or those that can afford to move out, move out, but everybody. You know, it's kind of guaranteeing a minimal baseline of coverage for everybody that the local town hall, the local community, municipality can enter into. That's how I envision it, because what I don't want to do is sell another product to somebody that's not going to be able to afford it, but is being smarter with the money that we do have and that cities have to enter into these policies.

You just reminded me of one of the things in talking to some of the city councils is, well, how about if the policy never triggers, right, and we're paying a premium. One, well, that's the risk we're covering and hopefully we never have to pay it out. Right. But the way the trends that we're seeing it and narrowing it to the perils that we see continue to happen. Right. Extreme heat, flooding and wildfire and coastal and sea level rise are things that we're looking at that we know are happening.

Our scientists are confirming that this is happening so that we're better be able to address and not just burden completely the State Government and Federal Government on the cost of this. And you get, unlike waiting for FEMA to come or waiting for traditional help to come, that takes time. This gives you immediate cash advances.

So how would. So I know this is a plan you have. When do you look at, there's some of this product that exists, but to this level it doesn't exist. So what is your plan or your goal to try to unveil it to the entire population of California? What does that look like?

Well, I think we're not that close yet. We are investigating on potential pilot programs that we could fund with nonprofits and other folks about how can we scale up a wildfire parametric program, for example. So we've identified different places around the state for LA, in particular, in our area, extreme heat is something that's critical. And so how can we create a pilot project? We were thinking about the city in San Fernando specifically, given that they've had the highest record temperature recorded in recent history outside of Death Valley. But people are living there, right?

And so we're looking at - what are our scientists in the Department are looking at, what are different ways we can tackle extreme heat for our lowest income folks. Right? How do we allow them, some people we've heard of, turning on the air conditioning cause they can't afford the Bill or the energy Bill. How about if we create some sort of program where the City of San Fernando says, if the heat gets to a certain amount for certain days and it triggers, you could use this money to pay your bills so that you could keep the lights on, keep your refrigeration, your meds, and your air conditioning to save your life.

So the possibilities are endless. I can now create an insurance policy on parametric for anything, it seems like. But this is what the world is doing already in innovating. And if you've told me that African countries can now scientifically determine when a drought is coming and be able to move their large herd of cattle with the insurance payout, I thought that was amazing.

And so technology and science is allowing us now to predict these much more accurately, which insurance companies are now also recognizing because they don't want to pay out the large payouts, and they want to be able to help in the mitigation of these projects so that we're not only controlling the impact of the event, but also saving lives. And now, wonderful thought, using insurance to save actual natural infrastructure that's critical for our planet. So we're starting to see all this develop around the world, and I want to start seeing how we can get that done here. We're the innovators. Right?

Right. How much of this, and I'll try to be very brief, how much is this is AI driven? Is AI has anything to do with determination and predictability?

I'm sure there's an AI component. AI, obviously the new buzzword. It's something that I'm sure we're looking at, but I'm sure there's going to be a role for AI to play in here as well. I mean, it makes sense.

Yeah. Okay. That's all I have. Thank you very much.

All right, thank you. All right, well, thank you so much, Insurance Commissioner. We greatly appreciate you being here. This, I could listen to this all day. This is fascinating.

I know, you and I both. We used to be fun, but now we talk about parametric insurance.

This is a fun hearing. We're gonna take that win. But thank you so much for being here. And thank you, Mister Peterson, for being here. We appreciate your participation.

Thank you. Thank you Chairwoman. And I hope you get a lot from this because I think there's a lot of opportunity for us to really be innovators in this space. And as you and I constantly talk, as we're increasing the participation of insurance companies and the industry at COP and at all these climate conferences. We are realizing that insurance has to be at the forefront of these discussions if we're going to continue to build and address the climate challenges.

This is one tool and one opportunity for us to kind of think of, think outside of the traditional frame of indemnity insurance with some of the best leaders that we have working on these issues. So I appreciate you creating a space for you all to have this discussion and thank you for your time.

You're welcome. Thank you.

Okay, our next panel is focused on providing more details about what parametric insurance is and isn't, and how it generally works. On the panel today, we have Lloyd Dixon, the director of the RAND Kenneth R. Feinberg Center for Catastrophic Risk Management and Compensation, senior economist at RAND Corporation, and professor of policy analysis at the Pardee RAND Graduate School. Thank you for being here today, Mr. Dixon. Welcome.

Pleasure to be here, Madam Chair and Members of the Committee. Thanks for inviting me to be at this hearing today. So, just background, RAND is a nonprofit, nonpartisan research organization headquartered in Santa Monica. And my role today is to provide some background on parametric assurance and talk about its advantages and disadvantages to set the stage for the more detailed discussions you're going to hear later and some of the information you already heard from Commissioner Lara. So let me start with...

Can you... Okay, yeah, let me start with. If you look at the screen here, I'll start with kind of the, you know, the just overview of what traditional indemnity policy is. So, first, you know, a purchaser policy chooses the peril covered, chooses the deductible and policy limit, and pays a premium.

A loss occurs if a loss occurs, and then there's a claim adjusting process, and then there's a claim payment based on the loss on that property. Now that claim payment could happen in weeks or months or even years, depending on if there's coverage, litigation, and that kind of thing. In contrast, we have the parametric policy.

The policyholder chooses or negotiates a trigger, which we'll talk about more in a minute. Chooses the amount paid and when the policy is triggered, and pays a premium for that. And so in this case, when there's an event, usually there's an independent party that determines whether the trigger is met.

And if the trigger is met, then there could be a requirement to have the policyholder provide what's called a proof of loss, that the policyholder did incur some kind of loss. And the reason for that is so that this policy, this product is considered an insurance product as opposed to a financial derivative.

So sometimes that's called a second trigger. And if that policy, if a policy was offered in the admitted market in California, it's likely that CDI, the California Department of Insurance, would require some kind of proof of loss. So that's an overview. And you've heard Commissioner Lara talk about some of the potential uses.

And I'll just tick down some of these just to provide some kind of concrete examples of policyholders, perils, and triggers. So you can have a city or a county buy a parametric policy for heat that would be triggered if the temperature exceeded 105 degrees for four days, for example. And then the payout could be used to provide bus services to cooling centers.

To pay for the bus service to cooling centers, for example. A local government, such as the Commissioner mentioned in New York City, could buy a parametric policy for flood that would trigger when the water depth increased on street, city streets increased, exceeded 2ft, and provide like $1,000 to vulnerable residents after disasters.

While, for example, the trigger could be based on the number of acres burned, a number of structures burned, and could pay for shelters or emergency responses not covered by FEMA. And then I'll skip to the last one there. An earthquake situation. You could have a homeowner by a policy that triggered if the ground velocity during an earthquake exceeded like something like 30 cm per second. And that could cover some of the earthquake deductible. Now, just timeline on these, so really they've accrued, the parametric policies have received increasing attention over the last 10 or 15 years.

2007 was the Caribbean Catastrophic Risk Insurance Facility that Commissioner Lara mentioned. In 2010, Alabama became the first state to purchase parametric coverage with a policy for state properties, including universities and schools. In 2017, the policy for that coral reef in Quintana Roo, Mexico, was first purchased.

And today, just for example, there's an insurtech startup called Jumpstart in California, which offers a parametric policy that offers 10 or $20,000 payment if the ground movement during an earthquake exceeds 30 cm per second. Now, at the bottom there of that slide, I think there's numerous examples of these policies, and we'll hear more later about how many of there are in the state.

But, you know, overall, I think the pace of adoption has been, you know, slower than many had hoped. And this product, these products are still, you know, at the early stages. So now, you know, I'll sort of go through kind of from a conceptual level the advantages of parametric policies.

So we'll sort of tick through like seven different advantages of these. So, first is payout speed. So, as we've discussed, payments can be made three or four weeks after an event. You know, the trigger's got to be verified that the trigger was exceeded, but, you know, quick, and it could have been quicker than that.

In contrast to an indemnity policy, where the payouts can take much longer and are usually tied to reconstruction of a property. Also, the efficiency parametric policies offer the advantage of efficiency in the claim adjusting process. So in a typical indemnity policy, something like 10 or 15% of the loss amount is the cost of adjusting.

And so for a parametric policy, you can save a lot of that 10 or 15%. So that gives you a more efficient kind of product. A third advantage is flexibility in how the payments are used. So for a parametric policy, the payments aren't tied to a particular use.

You don't have to use them to repair your home. You can use them for any particular process. So that provides the policyholder a lot of flexibility to use those funds for their best and highest use. A fourth advantage is, I think, is increasing the scope of what can be insured.

So indemnity policies are well suited to things that can be easily measured. You can measure the loss, I shouldn't say easily. You can measure the loss, figure out what the loss was. Whereas parametric policy sort of expands the limits of insurability that allows coverage for things that can't readily be measured.

So, for example, you can buy a parametric policy for the wetland services that are disrupted because of a flood. And very hard to measure what those wetland services are and how much they were diminished. Be hard for an indemnity policy to cover that. But one of the advantages, parametric expands the kind of things that can be insured.

Expands the insurability of things. So a couple more here. Another advantage is it allows a large number of claims to be processed simultaneously. So if you have a really large event and you have traditional policies, you need lots of insurance claims adjusters out there to go out and adjust them.

Parametric policies, because they don't have to actually go out and expect the property, can provide payments to a large number of people at the same time. So, example of this came up in the proposals for a federal pandemic risk insurance program that would provide coverage during a pandemic.

And parametric policies were proposed for small businesses. Because, you know, you could have hundreds of thousands of businesses affected by shutdown orders. And this would, the parametric product would allow you to get money out to a large number of people quickly, as opposed to having a big bottleneck of adjusters to figure out what the claims payment should be. Parametric policies can reduce what I call loss escalation.

So the rapid payment and flexibility in how those payments can be used can limit a downward economic spiral after an event. So after a disaster, you know, businesses close, that can just, you know, feed on itself and cause, in the extreme population loss, tax revenue loss. So this could be, the parametric policies offer some hope for that.

And then finally, advantage is, you know, enables, it enables micro-insurance. So micro-insurance is a type of insurance where you have small payments to a large number of people. But you can imagine if you have big loss adjustment costs, that would just be impractical to do that.

So the fact that you have this parametric product can allow those kind of micro, kind of, that kind of micro-insurance, which you see examples of in the rest of the country, the rest of the world. So those are some of the real attractive features of parametric policies.

And now I want to talk about some of the challenges of parametric policies. So first, you know, it requires some sophistication on the party buying the product because they'll have to understand, you know, what trigger's appropriate. You know, I'm buying this product, what am I getting for this product?

And it depends on a very judicious choice of the, of the trigger, which, you know, requires modeling, understanding the science, understanding the physical relationship between the trigger and the underlying hazard. So, you know, there's a need for some sophistication there. And, you know, insurance brokers can help with that. The large insurance brokers provide those modeling services.

But you know, that's in part why for the most part, these products are not so much targeted individuals, but at organizations or organizations that may buy them on behalf of individuals. So that's, I think that's in part why you see them targeted at not so much at individuals.

Now also, parametric approaches can be agnostic about the amount of mitigation that has been done. So regular insurance, if you mitigate your property, reduce the risk. Presumably that results in a reduction in your premium. In this case, the probability of an earthquake or a hurricane wind speed, that doesn't have anything to do with how much people have mitigated. So there's not that clear link. Now, for some hazards, you could see some kind of link, but I think it's weaker for parametric.

And finally, a risk is there's a potential mismatch between the policy payment and the amount of damage. So in an indemnity policy, you get, your payment is based on the loss you occurred, whereas here it may not be well matched. And the term for that is a basis risk. So you may hear a lot of that.

That's a kind of an insurance industry jargon for this mismatch between policy payout and the amount of damage is called basis risk. And to illustrate that, just go through a couple of examples of basis risk. So first, consider a situation where you have a loss, a type of mismatch.

There's a loss, but there's no payment to the policyholder. So, you know, an indemnity policy that can occur. So there's a type of basis risk there because you could have a loss, but you have a really high deductible, or, you know, or you have underpayment. You know, that your policy limit was low.

So there is a kind of basis risk. But I think it's magnified for parametric policies where, you know, sort of it's an augmented or additional risk for the policyholder. And that can occur if there is a loss. But, you know, for whatever reason the trigger was, the threshold wasn't met.

So, for example, Miami-Dade County bought a policy to cover its schools a number of years ago. The trigger was wind speeds of 87 storm hit, causing $19 million of damage to school buildings, but the policy didn't trigger because the wind speed was 73. So, you know, that was an example where, you know, they paid for this policy, damage happened, but there was no payout. Now, you know, Miami-Dade did not renew their policy in the subsequent years. So there's downside.

And if you were the risk manager who purchased this policy, I'm sure you had a lot of embarrassing moments when explaining why you didn't receive insurance coverage in that kind of situation. Now, sort of in the opposite situation, where you can have payouts, payment to the policyholder, but no loss. So now that's not possible in indemnity policy.

You know, you don't get a payment and you have a loss. But, you know, you could, if there was a trigger, the policy triggered, but for whatever reason, your particular property or your particular situation was not harmed. Now, the second trigger I talked about, you know, could guard against some of that. But, you know, that's a, that's example of, you know, what I'd call a sort of a targeting problem. So there's a policy, but the money ends up going to people who don't need it. And so I think that increases the cost of the overall policy.

You're sort of imperfectly targeting, in effect, the premium to people who didn't have a loss. So there's some downsides of these. That's the sort of basis risk is the downside. And I think the industry is innovating, understanding better how to deal with this basis risk.

And certainly better modeling and better understanding of the relationship between the trigger and the damage sort of starts to reduce this basis risk. So I've talked a lot about basis risk, but I wouldn't view it as a deal breaker, but it sort of provides kind of, I think the way to interpret it...

Parametric policies are better suited to some circumstances than others. This is one way to think about. And they're less well suited to situations where the policyholder's very sensitive to the probability or the possibility there's a large loss might occur, but there's no payment, very risk averse or wants to avoid that kind of situation.

Parametric policies may not be very good in that situation. Or there's a possibility that there's a payout that would be substantially larger than the loss. And if you got into that situation, then you'd have to, there'd be sort of these proof of loss issues, and they'd be more scrutinized, maybe expensive, and that would sort of undercut some of the very advantages of parametric insurance in the first place.

So parametric policies are better suited to situations where there's small or modest payouts to individuals when the benefits of speed and efficiency outweigh these targeting errors, or, you know, where there's good information on post event needs, or the overall damage will almost clearly be better than the policy payout. So, you know, let me just conclude with a couple of comments. You know, parametric policies show a lot of promise. They can help cover protection gaps that are left behind or that are left by traditional indemnity policies.

But, you know, want to underscore they're really nothing solution themselves or a silver bullet to the challenges currently facing the California residential insurance market. And also, you know, whether it makes sense for someone to buy a parametric policy, you know, a state, local, federal government, really depends on, you know, their ability to bear the risks themselves and, you know, how much they're willing to pay to transfer that risk to another party. Thank you.

Thank you. This is really, really interesting. Would a parametric policy have to be renewed every year, or is it, are they for a certain period of time? And what if the trigger's met?

Yeah, no, typically, they're a one year policy. I think it's typical. And so, and the question was, what if the trigger is met?

What if the trigger is met?

Yeah. So then the policy would pay out, and the insurance, the insurer has done a lot of modeling to set its premium, you know, to account for that. And a lot of these policies have paid out. And then it would be up to the parties the next year to, you know, renew it at a similar policy or a different policy. Sometimes, you know, we're always learning. So if there's a lot of policies that are triggered, that may lead the insurer to want to increase their premium moving forward to account for that likelihood.

Okay. And I think I understand this, but this parametric policy would not meet a mortgage requirement, correct? Or would it? Could it potentially?

I don't really know the answer to that. That's a good question. Yeah. I am not... Yeah. I don't know.

Okay. That's okay. No, I don't know either. So. But, you know.

That's a good question. I suspect that it would. I know in the context of Puerto Rico. Puerto Rico, this was mentioned earlier, was considering parametric policy to meet its FEMA requirements for insurance. When FEMA pays to have a building rebuilt, it requires that party to buy insurance similar to a bank would. And FEMA went through two or three years of deciding whether it would allow a parametric policy and ultimately did. But it was a whole process to get to that point. Maybe the home insurers would have to have a similar kind of decision making.

Interesting.

I do think, though, parametric works when you have portfolios of products. And so if you're talking about one product and whether a wildfire covers the damage on a particular structure, I would think the home insurer would think there's too much risk that they're, the trigger wasn't, the trigger, the property was damaged, but the trigger wasn't met. The threshold wasn't met for that particular product. So I would think it would cause home insurers heartburn.

Okay. Thank you. Assemblyman Gipson.

Doctor, thank you very much. You certainly expanded my knowledge of this product, but I want to ask a few questions. On your slide, slide two, you refer to an independent group who will make a decision. Can you talk about who that independent group would be and what it would be made of?

Yeah. So usually it's something like the USGS or it's, you know, who might measure ground movements, or the National Hurricane Center or, you know, it's a, it's a respected, established, expert organization with the skills to do that. And, you know, I think, you know, you'll hear a little bit later today from some of the industry representatives of, you know, more examples of that. But it's, you know, should be a, it is some kind of independent organization with known expertise in the, in the area.

And they will make a determination, and they will set up the ground rules, if you will?

Yeah.

So, for instance, so, because I want to... The other question I was going to ask you, I'm trying to find the slide. In terms of triggers. Right. I know my colleague asked about payout. Right. But what I thought I heard you say that if... I think you gave an example, that of a catastrophe taking place, but didn't meet a particular outcome in terms of loss. But the policyholder is just buying the policy in case... I mean, it's like insurance. I always say this, you better need it than not have it than have it than not need it.

So the insurance policy person gets insurance. They don't have the expertise of the education to set the level, and something happened, and it's one decimal or one percentage off. Right. So can you elaborate? Because it seems like there's a gamble.

Yeah, no, that's right. That's, you know...

Because we don't know. Right. We're, you know, we're auto mechanics. We do whatever. We're teachers. We're looking. We don't know in that depth. And you're going to tell me that, oh, didn't meet this decibel and, sorry, we're not going to pay it off cause it didn't meet the trigger.

That's right. That's right.

We would buy insurance to cover the loss that we have incurred.

And so that would be the... Yeah, so in the negotiation process or the purchase process, there would be, okay, here's the trigger. And that would be agreed to by the policyholder or the insurer. But as you say, you know, does the policyholder really have the ability to understand, you know, like the Jumpstart trigger's 30 ground velocity, you know, what does.

What does the hell that mean?

Yeah, exactly. That probably is a big earthquake, a big magnitude. But, you know, that's a difficult thing.

But my wall of my house is now on the concrete on the sidewalk. But it didn't meet a decibel.

Right, right. And so that was the example of the Miami-Dade County where, you know, the wind speed was 73, but the trigger was 87, so, you know, it just didn't get paid. Now, one way to deal with that is to have sort of a tiered threshold. So, you know, above 87, you get one thing, you know, above 75, you get another. So you could tier them so that there's different payouts depending on the intensity of the event. And that, you know, could reduce that. So you'd get 100%.

Let's say the payout was 10,000. You get 100% of that If it's seeded, you know, 87 or whatever, I said, but if it was 75, you get 40% of it. You could tier it. And that happens. There are tiered triggers like that that can sort of address different... But the point is there's these threshold effects where you didn't meet the threshold, so you didn't get the payment that you thought you were going to get when the event happens.

In your opinion, is there a mechanism for an appeal in case something is just disagreed on? Because, again, we're not these kind of practitioners who study this stuff, so we have to rely on people who are perceived to be experts. And I'm just trying to figure out if someone...

Yeah, that's a good question. Yeah. So that would be the, you know, the advantage of this is there shouldn't be, you know, this is, you know, a measurement. We've agreed in advance how to measure it. This organization will determine what the measurement is, and then it's done. Now, whether there's room for or grounds for appeal. Well, there was an error.

That organization did something wrong. I haven't looked into, you know, how often that occurs or how that, or, you know, what would happen if someone said, well, that was an incorrect measurement. And so, but the point, you know, the point is that that's the parametric is that's not supposed to happen. And you try to put in, or the idea is to put in a mechanism where it's very cut and dry, who measures it, how they measure it, and there's no dispute about that. But there probably can be dispute about anything. Probably. Precisely. Yeah. Yeah.

Thank you.

One final question. Do you know how parametric would work under Prop 103?

Good question. Well, yeah, as the Commissioner said, I don't think there's been any admitted parametric policies in the State of California so far. I haven't really looked at that. But if there has been, very few. And if it's admitted, then the Department of Insurance would have to approve the rate of that and approve the policy conditions and terms.

And presumably department would require a lot of modeling to say that the trigger, you know, there's a high correlation between the trigger and the payout or the trigger and the loss that would occur. So there'd be, you know, there'd be some relation between, if a trigger happens, we expect this kind of loss.

So I expect the department would do a lot of modeling of whether that trigger was appropriate. So to sort of address some of the issues. So that would be part of the regulatory structure in the admitted market. And then also, I suspect they'd require this second trigger that I'm talking about, that this sort of proof of loss to make sure the department had regulatory authority, that it was considered an insurance product as opposed to a financial derivative.

And so, but now you know, as we'll hear, the parametric policies are in the surplus lines market, and the department doesn't have rate authority on it or, you know, doesn't really approve the structure of the, of the product. So we have them, but they're, you know, not regulated under Prop 103 and so don't have, go through that process, but then also don't have the, not subject to the guarantee association and that kind of thing that the admitted market has.

Okay. Thank you. There are no further questions from my colleagues? All right. Thank you so much for being here today. We appreciate this information. It's very interesting. You're welcome. Okay. Our final panel is going to focus on examining parametric insurance and practice today and how it is currently being used by insurers and consumers.

On this panel we have Cliston Brown, vice president of public affairs at the Surplus Line Association of California, Karen Collins, vice president of property and environmental at the American Property Casualty Insurance Association, and Amy Bach, executive director of United Policyholders. Welcome, and thank you all for being here today. Whenever you're ready.

My purpose is to give you an overview of how and where parametric insurance policies are utilized in the surplus lines marketplace in California. To briefly touch on the nature of surplus lines, the term refers to insurance that is obtained from a carrier that operates outside the State of California.

Those insurers who are afforded rate and form freedom serve California consumers and businesses when no adequate admitted insurance market exists to meet their insurance needs. California licensed surplus lines brokers facilitate the placement of this coverage with California consumers and businesses, and those brokers are responsible under state law for ensuring that all pertinent laws and regulations are followed.

The Surplus Line Association of, California, as the appointed advisory organization to the California Department of Insurance for surplus lines and under the CDI's delegated authority, reviews more than 1.2 million surplus lines filings per year to ensure 100% compliance.

It is because of this review function that we have extensive data on all surplus lines transactions in California, including parametric insurance products that are offered to California consumers and businesses.

I will now share with you the data we have on parametric surplus lines transactions for the entire calendar year of 2023, as well as transactions through September 17th, 2024. In 2023, 57 parametric insurance transactions took place in the California surplus lines marketplace.

Of those 57 transactions, 41 were new business, including 26 commercial wildfire policies and 15 earthquake policies, and 16 were renewals, including 7 commercial wildfire policies and 9 earthquake policies. Total premiums for all policies in calendar year 2023 totaled about $14.8 million in 2024 through September 17th, 67 parametric transactions took place in the California surplus Lines marketplace.

Of those 67 transactions, 47 were new business, including 26 commercial wildfire policies and 21 earthquake policies, and 20 were renewals, including 6 commercial wildfire policies and 14 earthquake policies. Total premiums for all policies totaled approximately $6.7 million. We also have data on where the insured risks are cited.

For parametric earthquake new business, the bulk of the business was cited in Stockton, Monterey, and Oakland. And for renewals, almost half of the business was cited in Oakland, with the general footprint ranging from the Bay Area down to San Diego County and East Riverside.

For commercial wildfire new business, these sites of the risk are scattered to 39 communities throughout the state, with Glendale and San Diego having the most transactions. For the small number of parametric commercial wildfire renewals placed in the surplus lines marketplace since January 1, 2023, 6 were in San Mateo, 6 in San Luis Obispo, and 1 in Oakland.

As you can tell from the data I have provided, this relatively new product has been taken up only in very small numbers in the surplus lines insurance marketplace.

At the current take up rate, we might expect to see approximately 94 total parametric new business renewal transactions in the California surplus lines marketplace by the end of 2024, which would account for just under 0.008 of a percent of California's total surplus lines transactions expected by year end.

In terms of premiums, at the current rate, we might expect to see approximately $9.5 million in total premiums by the end of 2024, which would account for about 0.05 of a percent of total California surplus lines premiums expected by year's end.

We cannot predict the future of parametric products in the surplus lines universe, but at the moment, we can safely say that they are not a widely utilized solution. Thank you again for the opportunity to testify here today. This concludes my testimony, and I would be glad to answer any questions you may have.

Thank you.

Do we have the clicker for the I have a slide, please. Will it come up or do I need to hit some? Okay, thank you. I'm Karen Collins with the American Property Casualty Insurance Association. I serve as vice president of property environmental issues.

For those that may not be familiar, we represent home, auto and business insurers with a presence in every community across the US, and our mission is to protect people and help them recover from catastrophic losses.

For those not familiar with myself, I provide thought leadership on property and catastrophe issues, with a specific emphasis on risk mitigation resilience to these particular events. I also provide policy expertise on legislative and regulatory issues, not just at the state level, but also national and international level, for our membership.

My insights today are going to highlight why the parametric market is growing, a handful of examples of parametric products that are currently available, and also some of the considerations for insurers as well as consumers. So, first off, why purchase insurance? And this is, a little further. Okay. Oh, and we went too far.

All right, so why purchase insurance or a parametric? So, as mentioned, the primary function of insurance is to provide a financial safety net to help recover after something bad happens, whether it be a natural disaster or any other loss. Parametric insurance is a rapidly growing market that offers a uniquely different approach to recovery than traditional indemnity products, as was mentioned earlier.

The general idea of parametric insurance has actually been in use for decades through the application of large scale transactions such as catastrophe bonds.

But parametric options for consumers have really only been possible recently to greater availability of data at an increasingly granular scale, things like satellites, more powerful radar and advancements in sonar and even cameras.

And also the evolution of technologies, as was mentioned, we have remote sensing, machine learning, AI, that have all expanded the potential applications. For parametrics that have grown in popularity, we have noted that it's really the ability to streamline the claims process for both customers and insurers, particularly the faster payments after natural disasters and ability to fill protection gaps.

And we're seeing a lot of that in retail, agricultural, and also travel sectors. Parametrics can be used by businesses to provide financial protection from disasters or events that could interrupt their business operations. We've seen that there's also potential uses for cyber terrorism, pandemic, which was mentioned, warfare, economic downturns, and a variety of other events.

I'm going to specifically focus on a handful of examples of products that are currently in the market today for natural catastrophe perils.

So, starting with earthquakes and hurricanes. For earthquakes, as real time seismic sensors have become increasingly ubiquitous, data derived is allowing providers to construct earthquake parametric triggers and source calculation inputs for more accurate and tightly calibrated parametric insurance, as well as reinsurance products.

So, for example, earthquakes of a certain magnitude can be verified by the USGS, the US Geological Survey, which was mentioned earlier. The parametrics that we've seen available today include products from mid sized corporates and also municipalities that might provide non-damaged business interruption.

This year, actually for California, there was a new parametric that was announced that covers all locations within the University of California system. For hurricanes, triggers, again as mentioned, can leverage hurricane wind speed thresholds, which would then be validated at the time by the National Hurricane Center.

We have also seen parametric covers develop for reefs from storms, as well as a first of its kind parametric design to help a government meet the FEMA's obtain and maintain insurance requirement. This was mentioned, but it's really important to understand that this is a requirement that has to be met for a declaration, disaster declaration for federal aid.

And we've seen some challenges with that, including the state of Utah that's used it quite a bit for earthquake related coverage. Moving on to flooding, parametrics for flooding include commercial flood coverage that can be a standalone policy or also a combination policy with the more traditional coverage available through the NFIP, the National Flood Insurance Program.

We've also seen coverage for property and business interruption. That can be a diversification tool for those with existing large portfolios of coverage, meaning insurers, reinsurers, corporations, and certainly public entities. There have also been some unique community flood parametric programs designed to support low and moderate income communities as well as smaller farm owners.

In Colombia, I don't know if this one was mentioned, but there's been a farm owners parametric structured as a national program to better assist those rural communities because of the unique challenge that you tend to see in developing countries.

Moving to hail, this is a peril that causes a lot of damage across the US, including for car dealerships that have numerous vehicles exposed on uncovered lots. In Australia, they developed a parametric for a car dealership specifically, which relies on near real time hail measurements via a unit that got installed directly on the roof of car dealerships.

After measuring the actual size of hailstones, the payout amounts are determined based on a previously determined number of vehicles on the lot. And there's been interest expressed for this product to expand to other areas such as agricultural vineyards, stone fruit, and solar panels.

Wildfire, which is a hot topic in California, publicly available remote sensing data such as NASA's fire information for resource management system, can deliver near real time wildfire location data using satellite observations.

And the availability of higher resolution imagery and other data sources is improving the confidence and design of triggers and new indices such as the percentage burned of an asset base, for example, of a forestry operation.

So we've seen forestry operations and wineries that have been able to use parametric wildfire as a standalone policy or as an additional coverage in order to fill gaps in coverage, specifically things like non-damaged business interruptions or also as a deductible buy down. Now, parametrics provide benefits for both the customer and the insurer.

So starting with the customer, one of the biggest advantages, as mentioned, the streamlined claims process and speed of payouts following an event, often that can be within days or weeks. In the example of the hail parametric for car dealerships, the administrative claim side of things was significantly reduced.

You don't have an insurer needing to send somebody out to inspect vehicles, determine the extent of damage for those vehicles, determine if it's repairable, and then if so, what is that cost going to be? This is a very time consuming process, and it's essentially eliminated in full.

Following natural disaster, speeding up that payment process can also accelerate that disaster response and recovery and reduce possible follow on losses, which was kind of alluded to earlier. And consumers also benefit from the transparency of what the triggering event is and having certainty on the amount of payment that they would otherwise expect to receive.

For insurers, parametrics can increase the certainty by capping the total amount of liability, since that payment is based on a trigger being met rather than the actual losses. You also can see a benefit that the insurers may have an incentive to minimize their losses that ultimately can help reduce an insurance company exposure to moral hazard.

In reducing resources needed to support both underwriting and the claims adjustment process, you would also see insurers benefit that they can respond to their customer needs more quickly and then certainly with fewer administrative hurdles, policyholder satisfaction could potentially improve, leading to better customer retention for the insurer.

If you broaden this to more society wide benefits, there are some there as well. This includes reduced insurance fraud. Since the triggers are independently verified and the payment amount is fixed, it reduces those insurance gaps, expands coverage in developing markets where traditional insurance might not be available or is prohibitively expensive.

And also the standardization of parametric contracts can also make it possible to effectively transfer a policy to capital markets via the growing market for insurance linked securities. Moving to some of the drawbacks of parametric insurance, the biggest one noted is basis risk, which was touched on earlier.

That's whether the amount of coverage differs from the actual loss sustained or possibility of incurred losses without that trigger being met . But as mentioned, that does exist in traditional insurance, where there can be the potential for coverage shortfalls.

And what it means for parametrics is it really just underscores the importance of having an appropriate parameter or index for those exposures, and ensuring that metrics do get adjusted as needed to account for future changes over time, such as maybe the impacts of climate change. And one other potential complication is from regulatory hurdles.

There are a few regulations specific to parametric insurance policies, and these types of policies generally exist under the same regulatory framework as traditional insurance. In some jurisdictions, the regulatory framework could actually be a hurdle to receiving a timely parametric payout if that jurisdiction requires extensive proof of loss documentation.

Now in the US, regulators have generally accepted drone images and even text messages as a proof of loss, which can potentially remove the potential barriers to delayed payments. And lastly, some experts also argue that parametric coverage may fall outside the legal definition of insurance since it does not involve indemnity for a loss incurred.

Certainly that second threshold trigger of proof of loss can help address that. But since parametrics do not indemnify an actual loss incurred without that trigger, there could be actually tax implications for a settlement under a parametric or other financial considerations based on how they ultimately get classified as financial instruments.

So in closing, a rapidly growing market that offers solutions that can complement other risk strategies, as others have mentioned, the streamlined claims process and accelerated payments for both customers and insurers is really the biggest thing that's adding to the popularity and growth.

And we do certainly anticipate further interest in growth as more become aware of the potential applications. And I included in the last slide just a flurry of other resources, which I think a lot of us all have similar insights from. So you're hearing probably some overlap today on these.

Thank you. Hi, Amy.

Hi. Good morning. Is it still morning? I think it is. I'm so pleased to be with you today. Let me just get my slides going here. Okay. Is it the, the right one? The bottom one? Push really far. Ah, there we go. Okay.

Thank you so much, Chair Calderon and Members of the Committee and also the staff for initiating this hearing. Obviously, I think I speak for everyone, that we're all kind of hoping that the sustainable insurance strategy achieves its objectives in the new year and that we see some relief from the crisis.

But I think it's safe to assume that we're not going to really see the market ever quite rebounding to where it had been because of the advent of AI, drone images, risk scoring, and all the technology that's kind of collided with climate change to really shift insurance investors appetite for risk. So great that we're having this conversation.

Very, very interesting to hear what a low, relatively low take up rate there is for these products right now. But you're hearing, I think, from all the speakers, some optimism that this could be a contributing part of the solutions that we are going to be needing to bring.

So a little bit about my organization, if you are not familiar with us, or you didn't sit next to me at lunch at the NCOIL meeting recently, we've been around for three decades. We're based here in California, but we work across the country.

We're a 501c3, and our focus is to assist in disaster preparedness and recovery, advocate for fair insurance practices, and help solve problems that impede loss victims ability to be indemnified through insurance products. So, and a little bit you can at your leisure. Geez, read up on me.

But this is a topic that I have been looking at, a lot of us have been looking at this because through the work that I do at the national level with the federal insurance office and then the work that I've done over the years with the California Earthquake Authority, and now looking a lot, looking at our fair plan, I've been doing a lot of looking at the Florida Citizens program, their version of fair plan, and what are they doing differently, and cat bonds and all the different things that might kind of help us keep moving forward here to keep homes insured.

And that work goes across the three programs that our organization runs, which is the roadmap to recovery, the roadmap to preparedness, and our advocacy work. So the bottom line, as you've already heard, parametric products are already being used internationally.

Microinsurance, drought induced crop failure, and by commercial and governmental entities, and little green shoots coming up in the residential field. Parametric products can definitely help solve some coverage gaps and home insurance marketplace problems, but they're definitely not a panacea. I think we all have to recognize that.

They're not really insurance and you've heard sort of this discussion about how do we classify them so that they are properly overseen by regulators. They really only partially indemnify. So parametric products have been in development for many years. This is an abstract from 2021. Can parametric microinsurance improve the financial resilience of low income households in the United States?

Thinking, well, if people cannot afford a full insurance policy, maybe they could afford a parametric, and at least they would get something, right. Which I have to say, increasingly, since my organization is working in the hurricane areas we work in, we're on Maui, we're in the 2024 wildfire areas here.

Increasingly, our concern is that more and more people have no insurance, with deductibles being so much higher in the Gulf states that people are just not seeing the dollars, any dollars at all. You know, that their claims are falling below the deductible and so they're really having to turn to FEMA.

And obviously, you probably saw some of the headlines this week. I guess FEMA runs out of money every year, I've been told, but that was in the headlines this year, and Congress is going to have to do another appropriation.

And you all know, because of your insurance expertise, that giving away government money is not as sound as having an insurance pool where money was pooled, invested, and it's just a lot more healthy all around financially. So we want to try to maintain that whole pooling, risk spreading system.

So, examples of the triggers, again, you've already heard some of this. Wind speed, distance between property and an earthquake epicenter, the water level rise, precipitation fall. Those are some of the triggers. The product I'm most familiar with is the jumpstart recovery earthquake product. Actually, the founder of that is here.

So you probably will hear from her during the public period. So I have been in touch with her for years as she was developing that product and looked at it myself, because I have earthquake. I'm one of those, whatever it is, tiny little 8% of Californians that have it.

But because my deductible is like a hundred and some thousand, I definitely was interested in the product. Haven't gotten around to buying it. So Kate can tell us maybe more about that. What are some of the potential benefits to consumers? Well, you just heard one, right.

That it would fill a gap due to a high deductible, faster payouts, undisputed payouts. Right. We don't have the public adjuster or the lawyer, the adjuster, the independent. The fighting over all the fighting that can go on in the claim process that causes delays and money, affordable, simpler, and can fill protection gaps from excluded perils.

So we're seeing more and more limits on water damage, more and more limits on mold damage. We're seeing more limits on hail. So again, wanting people to be able to get some dollars from somewhere to pay for repairs remains our paramount goal. Parametrics have some potential there.

And then importantly, I think for all of us here, they can be the bottom layer of a cat recovery funding layer cake. Such as what you may be familiar with the CEA's structure with the premiums, and then the reinsurance and industry assessment layer somewhere down there on the bottom.

Having people buy parametric could be very helpful to making it more sort of whole cloth benefits to insurers, cost control, predictable payouts, product design flexibility. Right.

I gave the example of, you know, if you could have a, in the event of a CAT 5, still praying that Milton goes down below, 100% of limits could be paid out or 75 if it's a CAT 4, 50 percent to CAT 3. Potential benefits to government base layer of the layer cake. Financing for a quasi public private program and this concept of possibly paying premiums for low income households.

You're hearing more and more talk about should we use public money to buy renters insurance for low income households or to buy some sort of protection for households so that they have a safety net. It certainly is leverages tax dollars better than paying direct aid post disaster.

Downsides, not indemnification, doesn't make you whole, suitable for low to moderate losses, only covers a portion, one payment, meaning somebody gets that check and they better be responsible and not take it and go and buy, you know, the big screen TV or whatever.

We don't want a nanny here, but we also have to be realistic that the recovery is long and giving people a quick shot of cash may not get them where we want them. Consumer misconceptions about what they actually have in the way of protection is a potential downside. And then untested startups, no offense to Kate, she's been in there plugging away.

That's not an insult to her. Examples already underway. Jumpstart, something called Raincoat in Puerto Rico. Something called StormPeace. Something called First Track Hurricane. So very, very nascent market in the homeowner's space. This is a jump from Jumpstart's website. You can see how they're pitching it. No paperwork, no adjusters, no strings attached. Right?

10k immediate payout for individuals, 20k for small businesses. It's quite affordable, relatively speaking. Now you see, what is StormPeace's pitch? Eliminate your hurricane deductible, zero deductible. Fast payment within 72 hours. Average cost $300 annually. No inspections. So no underwriting here. Right. So this is just, these are things to be noticing. Same thing with First Track.

First insurance company of Hawaii. Prices starting at just $45 a year. So, you know, we like those things. Right. So that's kind of what I wanted to share.

And I just really appreciate that you're on this journey that we all have to be on right now, to turn over every rock and see what we can find that has promise. Thank you.

Thank you. I greatly appreciate all of you being here. So I have a question for you, Amy. How can individual consumers find parametric policies if they're interested? I mean, you just mentioned three or four. The average consumer doesn't know what.

It's a great question. And I think that because it's such a nascent market, you'd have to know about it because agents are not going to be selling it. So you really would have to, somebody would have to tell you about it.

I don't know what those four examples, advertising budgets are, but I think it would sort of, again, an opportunity. Maybe if there is a product that the state OES feels like they could bless, that maybe there'd be a role or the fair plan or something, some known entity that would promote the product.

I did want to touch on one thing that you asked about Fannie Mae or whether a lender. Yeah, no way, is my answer. No way. I mean, in fact, we're meeting with some of their folks later this week.

Fannie Mae and Freddie Mac right now are sort of, they're getting lobbied very hard by insurers to not enforce their requirement that the insurance that's in place on a loan on a home that has a federally backed mortgage should be replacement value insurance.

Insurers are trying to water that down and say, no, ACV is okay, depreciated coverage is okay. It's a huge fight that's going on. So I would say, you know, the idea that lenders would be comfortable with something like this is not very likely.

All right, thank you. And thank you for that extra information. Question?

I was. Well, thank you very much and certainly appreciate it. I would have additional questions. I'm just trying to wrap my mind around this new product and how it works for poor people and how the payout and how the determination is given by scientists or experts in terms of paying out. Right. Same question I asked before.

If it doesn't meet it and I bought it, I bought the insurance, why shouldn't you cover it? Right. And then who does fact checking with their science and making sure it's accurate and it's on point? Right. And where's the oversight that's necessary to making sure that people are not being taken advantage of?

So, you know, I just have those questions. Don't know, you know, very specific. I just have some reservation until I understand it fully. May want to reach out to you personally and have a conversation with my office, my team, because this is a new product. I see its benefit, but the average person buys insurance.

And if something happens, the expectation is insurance is going to pay out. If I get into a car accident, whether the person have insurance or not, I have not only liability, but uninsured motorists, then I'm going to be made whole. And this particular product, it's just a gamble because it's based on people I don't have relationship with.

I don't know, their mama, their daddy, where they live. And it's based on science. And if something happens to my property, I just want to make sure because I paid into it, that it's taken care of. And this gamble, it has to meet again, a Richter scale, you know, a decimal. And it's all new.

Right. Right. I mean, my understanding is like, you know, they have your bank account number, and if there's a, you know, if there's a 6.0 and you're in that circle around where the 6.0 hit, that money gets sent to your bank account. That was, that's how I understood it.

Which, of course, raises that issue of like, well, what if I didn't have any damage? But that's not, that's, that's that's not right. That's not an issue. Yeah, yeah.

So, and I think pre existing, I'm sorry, pre existing stuff, you know, that may already exist, that causes a house to crumble, you know, and you know how? Because you said no one is going out, no one is doing an evaluation, no one's doing an inspection. So again, I'm used to someone's coming out, someone doing inspections.

In this case, I'm paying for insurance. And then it has to meet a particular criteria. And if it doesn't, but I still have the damage, I'm asked out.

I was just going to add that I think this is why you're seeing a lot of the products that are available today are probably catering to more or develop more for sophisticated purchasers.

You aren't seeing it really widespread at a consumer level as far as a personal line sort of solution, a homeowners or an auto product or renter's product, that certainly there's tremendous potential and application down the road.

When you look at the business policies are being sold with business interruption, which is essentially loss of income or the foot traffic that's coming through, that could maybe translate to additional living expenses, the cost that you incur when you're out of your home, your ALE to stay in a rental property or a hotel.

It's like there's a conceptual, probably linear tie that you could envision that for a personal lines or some other immediate payout for expenses that fall below your deductible for personal lines. And so down the road it could evolve and give you more of that, probably, but it's not today kind of widespread.

Would this be supplemental insurance?

It would very much probably be something that you would supplement. It's not meant to replace an indemnity product, but what you are seeing from a homeowner's standpoint is that the cost to rebuild has gone up so much because of materials and labor.

And so the limits of coverage have had to go up and the cost of the premiums for those high limits are higher. And so then you see the deductibles that have to incrementally increase to kind of keep that same share of risk.

And so if you have this higher exposure from a deductible, this could be that supplemental that covers maybe that lower deductible for people that maybe can't absorb that. And so they're kind of the way it all has to start fitting together, piecing together.

And if they can't afford this, and maybe a community or a government can help with some of that for those that are most economically vulnerable. And so, again, one of many of the tools in the toolbox is, but these are kind of where you could see it going from a personalized, but those don't really exist widespread today. And they're going to have to test that out, probably more so in the other products that are available.

Assemblymember Valencia?

Thank you, Madam Chair. And really appreciate the information you've all provided today. To piggyback on the good Assemblymembers point, to what degree of education does the industry have in educating?

Policyholder, the potential policyholder of what the realistic situation can be, right. They were talking about 85-mile-per-hour winds, these severe cases. Does the industry come in and say, hey, you know what, there's like a 3% chance of this happening, but you're going to be paying this monthly. Does that really make sense to you?

Or is it more of a Ponzi scheme type that you come in and go, hey, we got this insurance product for you, go ahead, pay this and you're going to be covered. Would appreciate some information on that.

Yeah, I would say that these are very sophisticated transactions where a lot of that is probably a discussion back and forth on what the risk tolerance is and structuring these. These are being developed as a very individualized product. So it's not a, here's one product that's going to fit everybody. It's kind of what are your needs?

What are your exposures? What is your risk tolerance? And let's craft this individually. I would say there's probably quite a bit of disclosure in that because that's part of an ongoing conversation as they're developing these four very individualized purchases.

Yeah. And if I can just add, many years ago I was on a product enhancement Advisory Committee for the California Earthquake Authority and I kept saying, can't you develop some piece of this product that has some first-dollar coverage?

So, like, for example, like you want to make sure that people have enough to pay somebody to come and do a proper inspection, a structural engineer. So, you know, what happened here if they need that?

And, you know, what I got back was, well, you know, actually we, that's really, that's, I think a lot of insurers, they just don't, they're trying to avoid paying that first tranche. That's why they have the deductibles, you know, and a lot of the losses fall below the deductibles. And that works for them.

So it's, you know, we have sort of competing goals here. Like, for me as a consumer advocate, I want people to see some dollars. Right. And, you know, for insurers, they want people to hold those products as emergency products mostly. And you only use it when you have a really big loss and that's what it's for.

So that's why I think I'm kind of excited about these, if they could develop, because, like, you see, you know, who can't, I mean, $45, you know, starting at whatever, like that sounds good.

Sure. And then I guess it would just come down to whether or not it pays based on the damage, right. Or that $45 is gone. And I think it's something that we should track and monitor moving forward.

It sounds like based on what the Insurance Commissioner provided, although these products aren't available here now, in some specific cases, in some specific cases, to your point, more sophisticated scenarios.

But if we intend on moving into the residential space or just the regular average public space, I think we need to be mindful of those dynamics and figure out how we can best educate California as well.

Assemblyman Patterson.

Great, thanks. Just a comment. If obviously there's any response to this, I'd love to hear it. So I represent an area, or at least border areas that people can't get insurance and they're going to the fair plan and things like that and paying obscene, literally obscene amounts of money. And I myself have my insurers leaving California.

So it's been hard to find insurance for me. But I recently went to an area where the Caldor fire, you know, obviously devastated, you know, a few years ago and this entire community, Grizzly Flats, had burned down. Right.

And so individuals there for a lot, you know, there was no individual assistance given at that time for, I think, inexplicable reasons. Everybody in California was kind of hoping for that from the Governor, the US Senators, and for some strange reason that wasn't granted, unlike other disasters.

But in any case, there are people without insurance and don't have mortgages that live in the foothills and things like that. And part of the reason is because of obviously the cost of insurance.

And so I wonder if there could potentially be a product where an individual, after their house burned down that I had visited, they bought a trailer and were basically living on their property that they've owned for bazillion years, you know, but I wonder if this could be a product.

For example, I was looking at that one $10,000 one or something, right, where you've lost everything, but at least you have something to be able to go, maybe get a trailer to live in while you sort of figure everything else out. And whether or not even rebuilding is an option for you.

Is that something that is happening with these kinds of policies or could happen? Are there requirements that you have to have sort of primary insurance in order to get one of these policies? Things like that? I'm just curious.

I can start. So one thing I can say that I have seen some progress in is insurers being a little more flexible with letting people use their additional living expense benefits to buy a tiny home or a fifth wheel or some sort of livable trailer. Right. Which is good, because that's been a little bit of positive evolution.

It's small, but it is starting. It is happening. I know in the Santa Cruz mountains, there's been quite a bit of that, of people buying a tiny home with their temporary rent money. But I don't even know if. I don't think there is, there's not a parametric wildfire product. I don't believe there is.

And I think there's a very serious question whether anyone would sell one. Although again, it seems like there's investors. You could get an investor for something if it's very bite-sized.

The problem is if the AI says, it's not if, it's when it's going to burn, it's pretty tricky to find an investor who's going to want to gamble on that.

Yeah, I think what you describe is that there's a lot of different ways and approaches to recovery. It's not a one size fits all. There are clearly many who are going to want to rebuild and rebuild exactly as it was. If they don't have enough, maybe they rebuild to a smaller square footage.

If they don't have a mortgage that would require that. In some cases you have a lot of homes across the US that are homes that have been around for 100 years. And to rebuild those custom to what they were currently as a full replacement to the pre-loss condition doesn't make sense.

It would be much more cost-effective to go and buy a different home that's already existing that maybe is similar. Or in the case of a manufactured home.

You're not going to rebuild a manufactured home if it's damaged and fires, obviously most of the time they're fully burned out of sight, but you would go and probably just purchase a new one. And so there's a lot of different approaches.

Parametrics, as a smaller limit amount is probably going to give you maybe more funding to go and be seed money to a different recovery elsewhere or to a new purchase of something with a new loan payment for that. So I think it could certainly apply to that.

It certainly reminds me there's types of replacement products, insurance products known as functional replacement costs, wherever you may not have a full replacement cost value. And it's intended for those kind of older home situations where you're better off just going and buying another existing home that's still standing.

And so it could maybe be complemented with some of those, with maybe some of the deductible buy-down. Or there's again, many approaches and ways they can all fit together.

But to Amy's earlier point, I think these are why some of the conversations and concerns are being raised to some of the Fannie Mae and Freddie Mac entities, that there's a lot of different approaches to replacement costs and that there's different recovery and different products in the market because some of these unique needs and structures that are being covered in different ways, so.

You know, and I noticed that a lot in these examples that were given today are government agencies might go out and buy policies. And I grew up, I don't represent this area, but I grew up in Napa, which I feel like growing up, it was flooding every year.

You know, I remember taking boats around and stuff like that. And over the course of decades, the local governments, through partnership with the state and Federal Governments, invested in obviously upgrading the levees. We see that here in Sacramento as well. And so the likeliness to flood in Napa is a lot lower.

However, I wonder if the availability of products like that would decrease the investments made to do the work that actually needs to be done if we're even going to have people live there in the first place, right. I don't want to incentivize local or anybody.

I'm not just going to be local governments, but the Federal Government or anybody from saying, hey, let's not, you know, build up the levees or whatever because we have this product available. And I don't know, again, if you have any thoughts on that, but we obviously want to prevent the disasters from happening in the first place, right? So.

Well, actually, you know, you're touching on something interesting. When I was prepping for today, I checked in with Kate Stillwell about obstacles for the development of parametric products.

And she mentioned, well, that FEMA, in some ways you get punished if you have insurance, which they just fixed a piece of that, they've now changed it so that as long as just the fact that you have insurance doesn't immediately disqualify you for a grant. So that's good.

But I do think that when I've been looking at talking to municipalities that formed their own insurance pools, right, risk pools, when insurers pulled out in the nineties and stopped insuring municipalities. So they had to go get creative and build their own insurance programs.

And parametrics are definitely part of that, but mitigation has to be part of that, too. So I think these are the core building blocks of government-supported pools, is mitigation has to always be part of it. And then some layer of buy-in from the property owners along with support from government agencies that have the financial strength.

Right. And I'll echo that. You know, across the US, not just in California, we're seeing a lot of pressure in insurance markets and disruption. It's particularly pronounced here in California. But we're really dealing with two different issues.

We have availability because the cost of insurance has maybe fallen behind the cost of transfer risk, the cost to rebuild, all that with the losses and the fact that we've seen such an erosion of capital as we've continued to increase payouts to rebuild from so many states in so many areas, hurricanes, earthquakes, obviously wildfires, as insurance premiums catch up to that and kind of closes that gap and realigns that availability comes into the market.

But then you have the affordability issues that remain. To Amy's point, the mitigation, no matter if you're doing it as traditional indemnity product or a parametric, the cost of capital is going to have a cost.

And the more that we keep paying out, no matter what product it is, that cost of capital will continue to be pressured and then result in higher costs.

And so if we start to see a huge rash of payouts in parametrics, then probably prices will start to adjust and reflect whatever that cost to transport for that cost of capital. Mitigation for any sort of property loss, whether it's our residential communities or commercial property communities, mitigation is that best tool in the toolbox to slow down that payout.

We can't control Mother Nature and what's going to occur with that. But if we can prevent the losses from happening or the severity and extent of the payouts that are needed to do that, repairs or rebuilds, that's going to benefit all of the products that are available in the market.

All right, I'll just say one last comment on that.

That's a great point because obviously, if everybody in Napa, when I grew up, or if the local government started getting all these policies, continue to flood, continue to flood, continue to flood, they would still be incentivized to do the mitigation because they wouldn't be able to afford the policies in the first place because there would be so many loss payouts as a result.

Anyways, thank you. I appreciate it.

And one last question. Do you know if you have to disclose to your traditional insurer if you have a parametric?

I don't know why you would. Right?

I don't think that there's any requirement in the existing insurance process of that. There's generally in the claims process, if you have duplicate coverage particularly when it comes to, like, liability coverage. There may be some coordination of benefits, but it's not like a condition for the purchase of a policy.

You wouldn't want to usually have two policies for your homeowners and be paying two separate premiums. Certainly there's the risk of benefiting financially from that. So I think that usually they try to avoid having duplicate payments for the same loss. Otherwise you're not being indemnified. You are actually making out ahead of what it was.

So that kind of conflicts with the indemnity concept. But as parametrics are structured in what I've seen in the market today, to be as a complement or supplement to that, I don't think that they would pose a conflict. But as they evolve kind of with new products that emerge, it would be something to be just mindful of.

All right, thank you all so much for being here today. We greatly appreciate your presentations, and we appreciate you being here. Okay, we're now going to open this up for public comment. Any Members of the public wishing to make a comment, please come forward.

Good afternoon. My name is Kate Stilwell, and many thanks to Amy and Lloyd for teeing me up. I am the founder of Jumpstart Insurance. Jumpstart is the first parametric insurance for consumers in the United States. Now, not the only one, and it's for earthquake risk.

I started my career as a licensed structural engineer, and I come to insurance from the perspective of making sure that our built environment is strong enough to withstand an earthquake.

I served a term as a President of the Structural Engineers Association and worked on public policy committees with the City of San Francisco to work on disaster policy and understood that it's not just safe buildings that we need.

There are many other aspects of disaster recovery, and having enough money come into the system is what's going to prevent a city like Oakland from being the next New Orleans after Hurricane Katrina.

And that was around the time when I was working on those committees, and I was motivated to understand more about the role of finance and insurance on jump-starting the recovery process of us as individuals and our whole communities and the economy after that.

And I stumbled upon the notion of parametric insurance in 2006 and said, well, goodness gracious, if farmers in Africa can do this, why can't we get parametric insurance for consumers in California? Well, fast forward 10 years when we all had these supercomputers in our pockets. The technology was mature enough to deliver on this idea.

And the first folks that we went to were the California Department of Insurance. To engage them early and engage them often about, does this fit as insurance in the context of the definition of insurance. The reason we wanted it to fit as insurance is so that the proceeds would not be taxable.

From the consumer perspective, that's the most important reason to classify it as insurance, although it is not, doesn't look and feel like insurance because it doesn't make you whole based on what damage you receive. It's just enough. Doesn't rebuild your house.

It's just enough money to jumpstart your process of recovery, which is why we called the company Jumpstart. To make that abundantly clear, I want to share three lessons that we've learned and three projects that I'm working on. Jumpstart was acquired in 2021 by Neptune Flood Insurance. I now lead and operate Jumpstart under the umbrella of Neptune.

My role, my job title at Neptune is President of Parametric Insurance. Neptune is bullish on the potential of parametric insurance to really change the customer experience and also of insurance and disaster recovery, and also to help insurance fulfill its social good, to provide the safety net.

I'll keep my comments short because I see that we need to wrap it up. The number one advantage. So many of the panelists talked about the advantages of parametric insurance, but what we've learned from our customers is what they like better than the speed of payment is the lack of arbitration.

It puts them on a level playing field with the big guys and the insurers. They know exactly how much money they're going to get in what circumstances. The second thing we've learned is that people will prefer to buy it from a trusted advisor, the agents that Neptune works with.

So when Jumpstart was an independent company, we sold direct to consumer only. Now that we're part of Jumpstart, now that we're part of Neptune, we sell direct to consumer and also through Neptune's agency. The agents do not understand parametric. They don't want to sell it.

There's one agent out of Neptune's thousands of retail agents that we partner with, not thousands of employees. There's one agent out of those tens of thousands of agents who understands and advocates and sells parametric insurance. And he sells it as your first-dollar coverage. Exactly what Amy said is that this is your safety net.

This is your first line of defense. He calls it. You know what he says, you know why it's called parametric? Because it's your paramedic. It's your financial paramedic. It's the first responder, and it's the first money in. But it's not really the I word.

And that's why the best opportunity to get parametric in the hands and do the good work that it can do is through a trusted advisor, such as a municipal risk manager or such as a nonprofit like the Center for New York City Neighborhoods, who can operate and negotiate on behalf of the constituents, on behalf of the poor people.

That leads me to the three projects that I'm working on. Neptune does not sell parametric flood yet, but we are working on two projects. One is with the City of St. Petersburg. One of the reasons we're not selling parametric flood yet is that what we've learned from earthquake is that we don't want to sell it onesie twosie.

We want to sell it to groups so that they can disperse the benefits to their stakeholders and constituents. So one example is we're working with the City of St. Petersburg, Florida, which had gotten hit by Hurricane Helene and today is getting hit by Hurricane Milton, so that there are residents who occupy public housing will have a parametric benefit by virtue of being a public housing resident.

So anytime there's a very large flood and they're required to evacuate, they will get $1,000 to be able to evacuate, meet their first needs, whatever it takes to be able to meet the needs of their family in the case of a large flood.

Neptune's role in that will be to administer the policies, because that's what we're really good at. That's what's really automated. Here, Mrs. Jones. Here is your parametric paramedic first response flood policy. And you will get a text message when there is a large flood.

And we will get that money in your hands the next day with no arbitration, just based on the depth of the water as determined by the tidal gauges out in the bay.

Another project that we are working on is in the State of California, working with Kathy Schaefer on a three-tiered community insurance pilot with communities in the delta. So we use the structure of a GHAD, Geological Hazard Assessment District, GHAD, to pay for a three-tiered insurance premium for their community.

The first tier is a parametric payout if the floodwater reaches a certain depth. Everybody in the GHAD, whether you're a homeowner or renter, gets $10,000. 2nd Tier is an indemnity insurance policy with a high deductible, a $10,000 insurance deductible that allows the cost of that indemnity policy to be much, much lower.

And then third tier is excess indemnity insurance above and beyond the middle tier insurance policy. And the reason we structured it that way is that the first dollar coverage, the parametric, will, the cost of that piece goes substantially down if the community mitigates, if they raise the levees.

So there's a built in incentive to invest the public money to be able to reduce the risk that the community will flood in the first place.

I'll pause my comments there, except to say I will be happy to respond, as a member of the private sector, to any needs you might have on education, our experience, other projects that are working. So do not hesitate to call upon me if there you have any questions or needs or interests in collaboration. Thank you.

Thank you. Okay. Well, this concludes the Assembly Insurance Committee on parametric hearing, on parametrics. Thank you.