According to Paul Goulding, Chair of Airmic, parametric insurance and reinsurance solutions remain a work in progress but could become more mainstream in the future as more and more companies understand the coverage they can offer and the benefits of timely, hassle-free payment.
In a new report from Airmic in collaboration with Swiss Re Corporate Solutions, the commercial insurance arm of Swiss Re, and insurance and reinsurance broker Marsh, the benefits of parametric protection are highlighted, alongside the potential for greater utilisation of such risk transfer solutions in the commercial sector.
Airmic Chair, Goulding, said: “Parametrics is still a work in progress, but I can see it becoming mainstream in the future, because it offers certainty of timing and hassle-free payment.”
While not being as widely used as more traditional forms of insurance, such as indemnity coverage, parametric solutions are commonly utilised in the insurance-linked securities (ILS) sector, providing vulnerable people with protection against a range of perils that in some cases were previously viewed as uninsurable, while offering investors welcomed diversification.
The report does state that parametric insurance and reinsurance is used mainly in the catastrophe bond space, adding that risk managers in the travel, retail and agriculture sectors are starting to use this type of protection, while underlining the potential for parametrics to be used to protect intangible assets as well as the risk of cyber-damage, for example.
Towards the end of last year global reinsurer Swiss Re said that parametrics enable protection of both the intangible and uninsurable, stating that the clarity and neutrality of the triggers make the structure useful in managing earnings volatility as well as business interruption risks, with or without physical damage to property.
Commenting on parametrics and the new report, Swiss Re Corporate Solutions’ Head of Innovative Risk Solutions, Christian Wertli, said: “Concerns about large, complex risks directly related to business operations are on the rise – it’s about protecting revenues. Parametric solutions can be used as a business tool to provide certainty and speedy access to liquidity when most needed. Risk managers are enablers and we can work together to develop highly bespoke protection.”
While Airmic’s Research and Development Manager, Georgina Wainwright, added: “This is an area of insurance that has the potential to grow rapidly, both in terms of the extent of its application and the number of companies that use it. It can provide more options and ultimately ensure that insurance becomes a truly strategic purchase.”
For those in need of coverage, parametric solutions offer bespoke protection that importantly ensures rapid payout post-event, triggering when defined parameters are met, such as the amount of rainfall or wind speed, for example.
Described by Goulding as a work in progress might well be true for the commercial insurance sector, however, the ILS space is very familiar with parametric insurance and reinsurance protection and structures, as is the sophisticated ILS investor base.
For investors, parametric protection offers diversification in terms of trigger structure, location and peril, as the utilisation of bespoke parametrics enables new risks in previously under/uninsured regions to be both effectively and adequately covered.
Organisations such as the World Bank have previously noted the important role parametrics play in developing parts of the world, but as highlighted by Airmic’s latest report, there’s potential for such structures to become more and more common place across the risk transfer industry, to cover intangible threats such as business interruption (BI) and cyber, for example.
“Parametric insurance solutions can help firms reduce uncertainties around cover and cashflow arising from traditional policies and form part of their financial protection. For risk managers, taking the time to understand their firm’s ability to withstand future ‘shocks’ and gaining the support of the board are crucial first steps to incorporating parametric insurance solutions into their overall risk management strategy,” said Steve Harry, Risk Finance Consultant, Financial Solutions Group, Marsh.
The ILS market is very familiar with parametric solutions, and as such investors are very willing to provide capacity for these types of solutions that are expected to be more in demand as corporates’ risks evolve alongside the global economy.
It’s been discussed before that parametric solutions backed by the capital markets can provide a new way to insure against BI and contingent business interruption risks, from natural disasters, or other events that can be parameterised.
This type of protection creates a way for the insured to guarantee capital liquidity when it needs it, when the right parameters connected to a risk it fears most have occurred.
Essentially, the use of parametric triggers and ILS capital can transform these risks into something insurable and importantly investable, providing a way for large corporates to protect themselves against risks the traditional markets have often ignored.
Claire Combes, risk manager and Airmic board member, said: “I am excited about the ability to access parametric solutions. I believe they will increase the opportunity for a large organisation such as ourselves to be more dynamic in our risk transfer, in particular the ability to access more coverage in relation to non-damage business interruption.”
It’s also important to note that using parametric triggers can often close coverage gaps, providing insurance protection where before it was impossible, eliminating deductibles, and broadening risk transfer protection across more of the business enterprise.
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