Advances in data, new participants point to parametric growth: Artemis Live

Interest in parametric risk transfer and insurance is on the rise as the immediacy and availability of data improves and new types of market participants enter the fray, suggesting growth is on the horizon, according to industry experts.

During yesterday’s Artemis Live webcast, titled The Power of Parametric Solutions for Climate Resilience, senior leaders from across the weather risk management and re/insurance space discussed the expanding parametrics industry.

In partnership with the Weather Risk Management Association and supported by our kind sponsor Descartes Underwriting, this Artemis Live webcast featured Julian Roberts, Managing Director, Risk & Analytics, ‎Willis Towers Watson; Alain Lagesse, Director Group Risk Management, LVMH; Daniel Vetter, Head of North America, Descartes Underwriting; and David Whitehead, Co-CEO, Speedwell Weather.

Today, parametric risk transfer adoption is accelerating apace, as more granular and abundant data, combined with technology and an increasing number of capacity providers looking to underwrite risk on a parametric basis, collide to heighten the availability of a growing parametric solution set.

Against this backdrop, Roberts of WTW emphasised that although parametric insurance has been around for some time, interest is growing on the back of the availability of data.

“The immediacy and the availability of those data are incredibly useful. The analytical firepower that enables us to work with that data and some advanced modelling, again, transforms the utility of that data, which is all about solving client problems,” said Roberts.

“And, I think probably one thing that has helped the managers go down this route is managing away things like basis risk. So, increased sophistication of analytics, application of data, immediacy of the data, all these sorts of things have enabled the solutions that we are now able to develop, to be much more sophisticated and sort of narrow that sliver of basis risk down to a more practicable size and comfort,” he added.

Daniel Vetter, Head of North America, Descartes Underwriting, expanded on this point and noted that the landscape in parametrics has changed not only for underwriters, but for brokers and buyers, too.

“And it’s really the advent of advanced technologies in the satellite, radar and the ground sensor areas. And, the data that we can derive from these has really, greatly helped us not only to improve our analytical and pricing capabilities, but also have allowed us to really build models that can deal with the ever-evolving landscaping of climate risk,” said Vetter.

From the buyers side, Alain Lagesse, Director Group Risk Management, LVMH, highlighted three main reasons, or competitive advantages that parametrics have over traditional insurance solutions.

“First, as was touched upon by Daniel a few minutes ago, is if you set the triggers correctly and it’s a big if, because a lot of the work on parametrics has to go into the setting of triggers correctly so you get the payment when you need it. So, if you get that right, then the basis risk for a parametric product is much, much lower than the basis risk for a traditional insurance product.

“The second competitive advantage is trigger certainty. A parametric product, again if set up correctly, is very straightforward. If the triggers are met, they pay out, period. The term sheet typically is six or seven or eight pages, as compared to 60 or 80 or 100 pages of a traditional policy,” said Lagesse.

“And, then the third is the speed of payment. Parametric product pays out 30 days, 60 days. And basically in the same accounting year as the loss, that is very important for a CFO. Traditional insurance pays out at best in year-end plus one, and sometimes for complex bi claims and end plus two,” he continued.

Expanding on earlier comments around growing interest for parametrics, David Whitehead, Co-CEO, Speedwell Weather, told the audience that without a doubt, “renewables is on fire.”

“We’re seeing so much interest it’s really quite incredible. It’s primarily Europe, followed by Australia and the US. And what’s happening is, we’ve put out new indices, and we call these our wind power production indices. So, it’s an index that’s based upon the weather, so it’s based upon wind, but it’s converted to megawatt hours. And we’re seeing a lot of use of these products by wind farm operators. So, these guys are hedging against not enough wind. But then we’re also seeing interest from the traditional energy markets, because they’re worried about too much wind unexpectedly,” said Whitehead.

Additionally, Whitehead also discussed some recent trends in terms of market participants.

“I think as we all know, over the past decade or so, this market has been dominated by insurance and reinsurance. So folks like Swiss Re, Munich Re, Allianz, they’ve been out there working this market pretty hard. Over the past year though, we’ve seen a lot of hedge funds approaching the market. And a lot of them are sitting on the sidelines right now, but they’re investing significant amounts of money in building weather desks, where these guys are planning on taking on weather risk, and doing some speculative trading. So that’s quite a development,” said Whitehead.

You can watch the full hour long parametric risk transfer webcast session on-demand here.