Industry Parametric Protection (IPP) launched by New Paradigm

by Artemis on October 23, 2015

New Paradigm Group, the Florida based parametric specialist program manager that sells parametric insurance and reinsurance, backed by Allianz as well as third-party capacity providers including ILS players, has launched a new product named Industry Parametric Protection (IPP).

The company sees the product as an alternative for insurers and reinsurers to risk transfer instruments such as an industry loss warranty (ILW), so able to facilitate insurance or reinsurance protection to those requiring a flexible addition to their program, but with the added benefits of rapid and transparent settlement through a wind anemometer based parametric trigger.

Industry Parametric Protection (IPP) is a flexible parametric coverage, designed to fit into a cedants reinsurance or retrocessional program to provide tailored protection for U.S. named storms, hurricanes and/or surge risks resulting from such storms.

New Paradigm has been operating for almost two years in Florida, through their insurance MGA subsidiary New Paradigm Underwriters successfully selling parametric wind insurance as a supplemental risk transfer tool to corporate and commercial clients. Its initial success has been in selling parametric hurricane insurance covers, using simple triggers based on the WeatherFlow network of wind speed recorders.

The firm now also offers parametric reinsurance protection and is working on new perils such as storm surge and earthquake risk as well, which would enable it to expand further into U.S. markets. Its parametric wind insurance or reinsurance covers are already available around the entire hurricane exposed U.S. coastline.

New Paradigm seeks to bring efficient capital to its clients, in order to facilitate the transfer of peak catastrophe risks to insurance and capital markets in the most cost-effective manner, while leveraging parametric triggers that are transparent and easily understood.

That means the insurance-linked securities (ILS) market is a key capacity provider to New Paradigm’s products, which helps to diversify the sources of capacity and also enables the firm to offer fully-collateralised or balance-sheet options through Allianz. The largest ILS investment manager Nephila Capital is one capacity partner.

The firm’s success in the insurance marketplace has been attributed to its approach to selling parametric insurance not as a replacement for traditional UNL covers, but as a supplement or first-dollar coverage and a way to help close the protection gap between economic loss and insured loss caused by natural catastrophes.

This involves helping cedants to dissect their existing insurance protection and establish where a parametric product would best fit, and what the trigger should be, a process that has been overlooked by some buyers in the past.

The new Industry Parametric Protection (IPP) product fits this mold well. Seen as an alternative or even a complement for industry loss warranty (ILW) coverage, the key is to help potential cedants to understand how a layer of highly responsive parametric coverage can improve their risk transfer profile and enhance their protection.

The IPP product is triggered when predetermined wind speeds, or storm surge heights are met or exceeded at predetermined hurricane hardened measurement stations, operated by WeatherFlow. IPP can cover both wind and surge risks from any U.S. Atlantic and Gulf Coast named storms and hurricanes.

Evan Glassman, President and CEO of New Paradigm Group, explained that cedants coverage options with IPP can be completely bespoke and can vary by region, allowing the coverage to be truly tailored to their exposures, a key selling point given the high correlation between property damage and wind speed or storm surge heights.

“Industry Parametric Protection offers insurers and reinsurers a platform that enables the most efficient capital to find its way to each peak zone or region,” Glassman said.

The WeatherFlow networks’ nearly 100 measurement stations, located in key coastal areas from Texas to the U.S. Northeast, register the maximum sustained wind speed during a named storm and the data is then collected and certified by Risk Management Solutions (RMS).

Interestingly, both purchaser and seller of the IPP cover can monitor the wind speeds in real-time, as long as the WeatherFlow network has cellular coverage to its stations during any named storm.

This makes for a transparent calculation process for the parametric trigger and can mean a very rapid payout is possible for buyers of IPP protection, an increasingly important point for reinsurance buyers today.

The IPP is available both in traditional reinsurance and swap form, on a deal specific basis, through appropriately licensed intermediaries. It has both primary reinsurance and retrocessional applications, depending on the use-case and customer needs.

It could be taken advantage of as a retrocessional or “spike” cover, providing first dollar loss protection for similar pricing to a program’s top layer, the firm says. It’s also a useful added cover for those looking to put in place a hedge to provide them with extra liquidity after the next major event occurs.

IPP can also be used as an arbitrage opportunity, or as a way to hedge growth premiums, New Paradigm say, two other applications that are particularly relevant in a highly competitive insurance and reinsurance environment.

They sell this as reinsurance or, through an appropriately licensed entity, in financial form and the cover can inure to a re/insurer, captive or holding company. This provides an interesting risk transfer tool, similar in nature to a cat-in-a-box, but perhaps simpler and more transparent.

Overall the key benefits remain the rapid payout and the protection that a parametric reinsurance product could provide to earnings and ultimately shareholders. In this way it can be used in a similar manner to ILW’s and may also be attractive to ILS fund managers looking to protect their portfolios against peak catastrophe event risks.

IPP coverage can also be purchased as single shot or multiple limits in terms of reinstatements, tiered coverage with a sliding scale payout based on parametric factors, single or multiple year, and with the addition of a tide gauge trigger can be focused on protecting against surge or wind risks.

Buck Lyons, CEO of WeatherFlow, commented on the firm’s involvement; “Weatherflow has committed our substantial experience and technical expertise, along with a large financial investment, toward reliably and accurately measuring the force of hurricanes at landfall. We are incredibly pleased to now see our technical capabilities used in New Paradigm’s innovative effort to facilitate risk transfer and help the industry manage its exposures.”

“RMS is delighted to work with NPG on its new Parametric Protection product, making coverage easier and simpler for insurance buyers, and increasing the spectrum of risk transfer products and choices with which they can cover their risk,” said Ben Brookes, vice president, capital markets at RMS. “NPG’s Industry Parametric Protection product is carefully designed to let buyers minimise basis risk by choosing appropriate hazard levels at which to trigger contracts, whilst providing the most transparent settlement process of any ILW type product.”

Brad Meier, Chairman of New Paradigm Group and previously the founder of Florida primary insurer Universal Insurance Holdings, also commented on the launch of IPP; “Having previously led a company that was a significant purchaser of wind catastrophe reinsurance in the United States, the traditional ILW was presented as an option to be considered as part of the reinsurance program each year.”

“I always found the basis risk surrounding the accuracy and compilation of the industry loss data, along with the speed in which the data could be collected — to the extent that it could be — to be a concern. IPP was designed to address those concerns by being transparent and rapidly settling to allow for a bespoke structure tailored for each cedant,” he continued.

Basis risk is apparent in all triggers which are not pure indemnity, however the consultative approach to sales and structuring that New Paradigm and partners adopt, helping clients find the best way to fit a parametric triggered layer into their risk tower, enables them to minimise that risk for cedants.

This is perhaps something that some brokers could learn from, especially those that have pushed clients back towards indemnity in recent years, over industry or parametric triggers, often based on price. For those looking for a holistic approach to protecting themselves from peak zone risks, the IPP provides another valuable tool in the risk transfer box.

Liquidity at the time the most impactful events happen is vital for re/insurers and always will be. It’s something that the market may have partly forgotten in recent years, where industry capital has built up to excess levels and major losses have been largely absent.

But the need for liquidity after the biggest events can’t be understated, which in our eyes makes a coverage that responds to either event or market loss factors extremely valuable, especially in a market where pricing has been depressed, terms stretched and some underwriting nearing cost-of-capital.

For the ILS market the IPP will be attractive both as a portfolio protection tool to shave off some of their peak exposures, in the same way that ILW’s are utilised today.

Of course IPP is also a product that ILS investors would be keen to provide capacity to back so, as New Paradigm grows its client base, we’d expect to see a significant amount of the capital backing their products come from the capital market and ILS fund managers.

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