James Thaler
...consider alternative risk transfer solutions and led to a sharp rise in interest in parametric coverage, multiple executives have said.
While still a small part of the catastrophe market – industry premium figures for parametric products are in the hundreds of millions by some estimates – industry executives at intermediaries and carriers alike described growth in the segment as “exponential” in recent years, as result of improved buyer education, price efficiency, and “success stories” of paid claims covering a variety of perils in the past year.
A spike in unpaid BI claims and economic losses tied to natural catastrophes has also been a driver in surging interest.
No loss event has exposed the ramifications of unanticipated business interruption losses so much as the Covid-19 pandemic, with businesses around the country having faced billions of dollars in uninsured damages.
For that reason, many insureds have re-examined their insurance buying with an eye towards filling in gaps in coverage that may arise for exposures outside the traditional realm of indemnity insurance.
Filling gaps in coverage
Some insureds are opting to pursue parametrics as an alternative to deductible buydowns, choosing to take a higher retention in their traditional indemnity program and buying parametric covers for the breadth of coverage. Others choose parametrics for the liquidity they provide – near-instant payouts as an alternative to a long and uncertain claims adjustment process.
Buyers are rethinking their approach to indemnity covers. “They get the best coverage they think they can get for that money and then not have it perform as they thought it might, in the worst event in their lifetime, it makes them questions some things,” said Alex Kaplan, executive vice president within Amwins’ alternative risk group.
“As we're seeing with all these events – whether they're pandemics or nat cat events or cyber events – we just don't know how they're going to metastasize across an individual entity balance sheet.
“These risks are commingling in such a fashion that just aligns itself perfectly to a parametric because you have the ultimate flexibility in how to use the proceeds.”
Proponents of parametric products emphasize that their value stems not from replacing traditional cat coverage, but to fill in gaps in an insurance program and cover forms of loss not typically included in traditional indemnity coverage.
Parametric policies differ from indemnity policies in that they pay out claims based on a triggering event – such as a windspeed threshold or the scope of seismic activity – rather than as a result of damage to an insured structure.
Brokers and underwriters both said that educating buyers on parametric coverage involves helping insureds shift their thinking to buying balance sheet protection rather than securing coverage on particular assets.
The breadth of coverage parametric instruments offer makes it difficult for insureds to make direct cost comparisons between what could be considered similar indemnity coverage in the traditional market.
Increasing demand
“The parametric market has always been relatively as supplied rather than demanded,” said Paul Ramiz, director of innovation and solutions at Aon in the UK. “And that's changing,” he added. “Suddenly you're seeing a surge in the demand side.”
Ramiz said the combination of tightening capacity, higher catastrophe pricing and uncovered losses stemming from the pandemic has been pushing clients to consider parametric solutions. Speed of payment following catastrophes – when claims can sometimes take months or even years to adjust, is also said to be a critical factor in the product’s appeal.
Ramiz said interest in such products had gone “through the roof” in the past 12 months.
“If you've gone through a bad claims experience in the past – in the Caribbean, for example, after Maria – it might have taken 18 months to settle the claim for a wind loss.
“Where every penny counts and liquidity and cash flow are of paramount importance, a parametric policy that can settle a claim within 30 or 60 days for a hurricane loss is quite valuable.”
Mitigating basis risk
Price and concerns over basis risk – whether a policy will be triggered as expected when damage occurs – have been among the primary sources of hesitation among buyers in securing parametric coverage, to which advocates for the alternative structures are quick to point to the innate basis risk embedded in traditional indemnity coverage.
“From our perspective, there's as much basis risk in a big deductible or in a household policy as there is in parametric, with data being the arbiter of the claim,” said Ramiz. Others noted exclusionary language in traditional indemnity products.
Daniel Vetter, who was tasked to lead Paris-based MGA Descartes’ US operations in December, said advancements in satellite, radar and ground sensor technology in the past five to seven years had allowed underwriters to design a more effective product that has narrowed the potential for basis risk compared to earlier iterations.
“It allows use of that technology to better underwrite, quantify, and analyze the risk, and essentially tailor a better product for the customer and their brokers,” he said. “It has really allowed us to narrow basis risk considerably.”
While many acknowledge that parametric products have historically been seen as more expensive, they point to greater tailoring that is now possible. As parametric products have become more sophisticated, Descartes’ Vetter describes his company’s offering as taking “a menu approach”.
“We can make it as expensive or inexpensive as a client wanted it to be.”
Parametric policies have evolved to the point where payout patterns can be structured based on the severity of an event, resulting in more focused coverage that could be more cost efficient. The coverage can also further be isolated to specific geographies where property concentrations are heavier, further allowing the ability to create a more tailored product.
“That's the beauty of it, which a traditional cover can’t do because a traditional policy underwrites the physical structure. We underwrite the actual events.” To that end, Vetter said risk quality – such as whether the property is highly protected or has certain structural features – matters less.
More client education needed
A big challenge in the market’s maturity for brokers and underwriters alike has been educating clients on how the products operate and where they could be used most efficiently.
Chad Wright, head of alternative risk transfer for the US and Canada at Marsh, said “a huge percentage of clients” were considering parametric options, but acknowledged that many of those clients had yet to commit to buying the coverage. “But the ones who are implementing are going very deep into understanding what their exposures are and how the product works, and [developing] a very deep understanding how it differs from a standard indemnity policy.”
Wright said his team devotes a significant amount of time to educating clients on the benefits of the product, and expects adoption to increase as it becomes more familiar. “I think once people go down the path of exploring and doing the analysis, they have a much higher probability of actually implementing the solution.”
Evan Glassman, co-founder of Miami-based parametric MGA New Paradigm, said there had been a “sea change” among brokers and buyers in becoming educated on the coverage, which has accelerated the pace of adoption.
Part of that education, Glassman explained, is taking a more expansive view of the cost of risk, and a greater recognition that coverage gaps within a deductible or sources of loss not typically covered by traditional insurance typically dwarf premium outlays.
“With parametric, we get into a more holistic conversation with the insured and their broker around how to manage their exposures around hurricanes and earthquakes.”
“You have significant BI losses that are not covered,” Glassman said of traditional indemnity products. “With parametric products, because they are independently triggered by independent third-party characteristics, we don't have those challenges,” he said. He also added: “It provides for near-immediate liquidity following events. Without argument.”
Marsh’s Wright also said the involvement of traditional balance sheet carriers had led to growing acceptance and familiarity with parametric solutions, as clients are able to secure coverage from underwriters where they have pre-existing trading relationships.
“It used to be you had to go to the capital markets and structure a solution with a capital market provider. Today, that's still a solution, but it's really more of a solution for really big, huge parametric capacity.”
Divergent views on cost, feasibility
Despite rising interest in parametric covers, some view the products as a hard market tool to fill in gaps when coverage is restricted, while others see it as a soft market buy, when insureds are able to save money on traditional indemnity coverage and choose to deploy those savings on top-up protection.
At USI, the broker’s national real estate practice leader Brian Dove estimated about 30% of clients had expressed in parametric products, but that price hurdles had been difficult to overcome.
“The biggest problem with these products is they're really expensive,” he explained. “Everyone wants to see it, until they see the price tag. It's really cool to talk about and people are really intrigued by it, and then they get the sticker shock.”
Dove says that when faced with the choice of retaining risk versus paying significant costs to transfer that risk through parametrics, USI clients were opting towards retention.
“We've got coverage, we're protecting the top side of our risk, but I'm really not as concerned about the bottom side of my risk,” Dove said, in explaining clients’ thinking.
Increased accessibility
Among the more significant innovations in recent years has been the increasing availability of parametric products to the SME market, which carriers have increasingly been able to serve thanks to improvements in data and technology.
Wes Robinson, president of national property at wholesaler Risk Placement Services, said the availability of parametric solutions to a broader spectrum of clients has led to such products becoming increasingly viewed as mainstream risk management tools.
He noted that whereas previously parametric coverage had only been available to a very specific set of large clients with billions of dollars in insured values, for multi-year terms, and with seven-figure premiums, now policies for as little as $25k in premium can be purchased online in minutes. “It's no longer just for that large, very specific client,” he said.
In 2019, Swiss Re launched SME-focused Pop Storm platform, which provides parametric windstorm coverage through an online portal in seconds.
Cole Mayer, vice president for innovative risk solutions within Swiss Re’s Corporate Solutions unit, said the (re)insurer had seen demand for parametric products “skyrocket” in recent years, as loss activity and “risk perception” increased. He also said that claims being paid on parametric covers in recent years had boosted confidence in the product, which has further driven demand.
Last year, Swiss Re paid claims on earthquake, hail, and wind losses tied to parametric covers.
“It's not a conceptual, nebulous thing, but they're paying out like we thought they would. They're paying very quickly, and that broad coverage can be used very powerfully.”
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