Parametrics to grow in 2018 as re/insurers look to resilience: Clyde & Co

International law firm, Clyde & Co., expects global insurers and reinsurers to focus on the potential opportunities and challenges represented by the protection gap as resilience takes centre stage in 2018, highlighting the benefits and expansion of parametric solutions.

Clyde & Co. has released a number of insurance industry prediction pieces for 2018, from a range of the firm’s international insurance industry experts and observers.

The protection gap, being the disparity between economic and insured losses post-event, has for long been a hot industry topic, and recent catastrophe events in the third-quarter showed how a lack of insurance penetration isn’t just testing the economic, social and financial resilience of emerging markets, but also the world’s most advanced markets, such as the U.S.

“Insurance has always been about building resilience into the economic system and it now has the opportunity to make a real impact on the lives of the world’s most disadvantaged,” said Clyde & Co’s Simon Konsta, London.

“Technology is the key, providing new ways for structuring and selling insurance, with concepts like parametric insurance starting to gain real traction,” continued Konsta.

Parametric structured insurance solutions, which are a common feature of the insurance-linked securities (ILS) space – being utilised in numerous catastrophe bond transactions and also favoured by national and regional catastrophe risk pools, enable rapid payout post-event and are increasingly being used by governments around the world.

“These products provide certainty, speed and, importantly, are attractive to governments and NGOs as a way of providing support to whole communities,” said Konsta.

Unlike indemnity insurance, parametric protection is structured to payout around a set of predetermined parameters, such as the volume of rainfall during a specified time-frame or a hurricane’s wind speed as it passes through a predetermined location, thus eliminating the need for timely loss-assessment processes post-event.

This means funds are dispersed rapidly once a qualifying event has triggered payment, meaning that those in need, such as governments and individuals, receive the funds much faster than with a typical insurance contract and can therefore begin rebuilding much sooner.

Clyde & Co’s Stirling Leech, Rio de Janeiro, explained how parametric insurance is gaining traction in Latin America.

“New approaches to risk transfer such as parametric insurance for loss resulting from weather and catastrophic events have begun to arrive in Brazil, expanding the range of risks that can be covered.

“The country has just seen its first climate-indexed parametric insurance policy offered by Swiss Re to a large agribusiness corporation, and we expect that this will now develop further in the country and elsewhere in the region,” said Leech.

The development and expansion of parametric insurance solutions supports the desire and belief amongst the risk transfer industry, and global development and resilience organisations, to provide those in need with protection against the world’s perils, many of which are believed to be increasing in both severity and frequency as a result of climate change.

“There are of course issues that need to be tackled before any real progress can be made. A lack of knowledge about how these products work, a lack of regulatory and legal certainty and a lack of trust are all hurdles that the industry must overcome.

“There are many in the industry working to make this a reality, including ourselves. I expect resilience to be a watchword around the industry for some time to come,” said Konsta.