Guillermo Franco, head of catastrophe risk research at Guy Carpenter, a company working with UOC researchers to develop novel insurance products
One of the challenges that universities set for themselves is to ensure they bring the knowledge they generate to society. They can achieve that goal any number of ways, but one of the most interesting is when their research allows them to develop technological solutions in collaboration with the business community. The Internet Computing & Systems Optimization (ICSO) research group at the Universitat Oberta de Catalunya's Internet Interdisciplinary Institute (IN3) is an example of just such a collaboration. The ICSO team is currently working with Guy Carpenter to develop optimization algorithms for its GC QuakeCube® technology, which provides rapid insurance payments after earthquake events to enable more efficient risk coverage.
We talked with Guillermo Franco, the company's head of catastrophe risk research, about Guy Carpenter's project with the ICSO group and the importance of the company's joint endeavours with universities like the UOC.
What exactly does GC QuakeCube entail? Are you already using it?
GC QuakeCube is a parametric earthquake insurance product. It provides our clients with rapid payments after an earthquake without the need to engage in a lengthy claims process. The funds received can be used without any restrictions as long as they are used to offset losses caused by the event. The policy establishes the payment amount based on the location and size of the earthquake, characteristics that become available within hours of the event.
GC QuakeCube has been used since 2015 to place about $900 million of earthquake risk in the reinsurance market on behalf of governments and large corporations.
What made you want to develop such a technology?
The penetration of earthquake insurance around the world is relatively low. For example, in California, only about 10% of households buy the coverage, partly due to the high cost and to some distrust of existing insurance products. Consumers are wary of the "small print," exclusions and limitations typically associated with traditional policies. We believe that the development of products that pay faster and more transparently, such as GC QuakeCube, will be easier to embrace and will therefore foster more risk protection.
Could it be applied in cases involving other natural disasters, like tsunamis, and not just earthquakes?
The technology behind GC QuakeCube is geared towards maximizing coverage for the insured while minimizing its cost. These principles apply to all natural disasters and, from that perspective, the work we have carried out for earthquake is extensible to other perils.
GC QuakeCube can already provide coverage for tsunami as the damage caused by this peril is to a large extent determined by the location of the earthquake’s focus and its magnitude. For a tsunami to occur, there needs to be a sizable vertical displacement of the ocean bottom, which we know can occur only in particular regions and at particular ranges of magnitude.
We are currently working on a similar system to estimate losses from tropical cyclones with an approach akin to that of GC QuakeCube.
What are the main challenges facing GC QuakeCube at this point?
The main challenge for GC QuakeCube, as for any parametric insurance product, is the novelty and complexity of the mechanism. Insureds are not used to thinking in terms of the characteristics of the events when it comes down to expecting a recovery from their insurers. They are used to thinking about the loss they incur and, once that is established, they expect to recover from their policy accordingly.
With parametric insurance, we are asking the client to make a mental leap to thinking in terms of the size and location of the event rather than on the direct impacts the event might have on its property. This brings "basis risk" into play, the possibility that the recovery might be different than the actual loss. It could be higher, which means the insured obtains access to funds they do not need or, worse, it could be lower, meaning the insured is left financially exposed.
Walking the client through these issues and the potential beneficial and adverse scenarios that might materialize is, in my opinion, still the greatest hurdle for the adoption of GC QuakeCube and all other parametric insurance solutions.
How did the opportunity to work with the UOC's ICSO group arise?
The opportunity to work with UOC’s ICSO group arose serendipitously through a common acquaintance. About six years ago, a good friend, Prof. Juan Carlos Perez Vazquez, introduced me to one of his colleagues, Prof. Angel Juan at UOC’s ICSO and we quickly discovered that Angel and I had many common interests. Our conversations quickly spurred us to start a couple of pilot collaborations, which were fruitful and fun. We formalized this joint work in 2019 with a corporate three-year collaboration agreement between Guy Carpenter and UOC.
How would you rate the collaboration so far?
The experience has been phenomenal. We have produced several pieces of work that have helped us advance some key aspects of our research and development process. Some of these efforts have also led to publications co-authored by UOC and Guy Carpenter colleagues. UOC’s ICSO faculty and students are extremely knowledgeable, capable, professional and kind. It has been productive and a delight to work with them.
Do you therefore hope that you can work together on new projects in the future?
The joint work we have completed has spawned new questions and opportunities. We are very happy with our progress so far and we are looking forward to continuing our work together in one way or another.
Do you find it difficult to get the chance to work with research groups or is it standard practice for you?
I feel privileged to have the opportunity to work with many academic groups around the world. It is part of my role to frequently serve as a liaison between our company, our clients and academia. My previous experience in research has helped me establish connections and I often attend conferences and try as much as I can to maintain a presence in the research community.
For many corporations, it is not the norm to be able to access the right groups within academia. Throughout my work, I have witnessed many challenges and obstacles in establishing and executing collaborations. Notably, some companies are unaware of the work being carried out in the research community, which makes it harder for them to identify potential joint efforts. When these collaborations arise, communications are often difficult as we tend to speak with different terms, have different underlying objectives and progress on different timelines. I think that understanding the uncertainties and the requirements from both sides is critical to creating fruitful projects.
Should companies work to make collaborating with universities more common?
Absolutely. I think there is enormous untapped potential. However, to be successful we need to be conscious that these collaborations take time and effort and that they may not always lead to success. It takes time to get to know one another and to get to know one another’s objectives and constraints before productive outcomes are within reach. Both sides need to be committed to putting in some work and both need to realize that, wherever research is concerned, there is always some likelihood that the desired goal will not be reached.
How are you handling the current pandemic? In your opinion, could the situation provide you with the opportunity to tackle new challenges and rely even more heavily on scientific knowledge?
The pandemic is making some vulnerabilities and gaps in our industry more obvious. The need is great for more straightforward business continuity protection in a situation like the present one. There is already a lot of chatter about new parametric insurance products for pandemics that can respond faster, with fewer exclusions and less “small print.” This will bring the need for more research at the confluence of finance, numerical optimization and epidemiology. We will need to explore the physical measurements at our disposal for triggering parametric payments, their reliability, and how well they correlate with financial losses. This will be a complex endeavour that will create myriad new opportunities for scientific collaboration.