Aon seeing “demand surge” for parametric risk transfer products

Insurance and reinsurance broker Aon said today that it is currently seeing a “demand surge” for parametric risk transfer products, as clients look for solutions that can rapidly deliver cash flow after loss events occur.

Aon said that its Innovation and Solutions team, a specialist unit focused on innovative risk transfer structures including parametric transactions, has seen a “dramatic increase in the number of clients seeking to understand how they might supplement or replace their existing risk transfer programmes with parametric structures to potentially improve cashflow following a loss event.”

2020 has been a transformative year for the use of parametric triggers and parametric risk transfer, with increasing noise in the marketplace on the benefits of parametric solutions.

Helping to drive the increased awareness and demand for parametric risk transfer has been the volatility caused by the pandemic this year, as ceding companies and insureds are increasingly focused on solutions that can rapidly deliver cash and enable better business continuity as a result.

Aon gives a prime example, highlighting the fact that a leading United States-based telecommunications company operating across multiple territories, elected to replace its entire traditional property indemnity insurance programme with a $300 million parametric hurricane insurance solutions that encompassed its operations in 29 different regions.

Landmark parametric deals like this are seemingly coming to market increasingly regularly, with reports of a number of large transactions in the hundreds of millions of dollars this year, as parametric triggers are increasingly embedded within large corporate risk transfer programs.

We’ve heard of a number of very large parametric risk transfer transactions in 2020, in regions such as Puerto Rico, elsewhere in the Caribbean and Mexico, Australia and Asia Pacific, largely as insurance although some on a reinsurance basis as well.

In addition, 2020 has seen a number of parametric catastrophe bonds successfully issued, a couple of which have been particular landmarks for the use of ILS capacity more directly to protect insureds.

Aon also highlighted today that parametric risk transfer solutions can be particularly beneficial when capacity is constrained in the traditional insurance or reinsurance market.

As parametric structures can be supported by a range of capital sources, including both traditional and capital markets capacity, they open up new sources of risk capacity to some clients.

They can also be structured to address a wide range of weather related exposures and other loss events, with United States hurricanes being one key area of focus, Aon said.

Aon has today extended its long-term collaboration with parametric and weather risk transfer solutions specialist CelsiusPro, in response to the rapidly rising client demand for parametric products.

The pair can deliver risk transfer solutions that have data available for the triggers within a few hours of an event, enabling rapid calculation of any claims and payouts generally being made within 30 days, and sometimes as fast as within 48 hours.

Paul Ramiz, Director of Aon’s Innovations and Solutions team, explained, “Due to the speed of the payout, parametric solutions offer clients immediate and quantifiable cashflow as opposed to the delayed cash replacement offered by traditional insurance. All parametric products are bespoke, so the client really does receive a solution that reflects their unique blend of risk.”

Kurt Cripps, Managing Director of Aon’s Innovation and Solutions team, added, “We are pleased to announce the extension of our long-term partnership with CelsiusPro. As an experienced parametric solutions provider, CelsiusPro is able to access and process extensive volumes of climate and natural catastrophe data, combined with its fully automated processes for risk modelling, pricing, and policy management. Our joint capabilities enable us to innovatively use analysis, placement, structuring and settlement that allows us to deliver tailored solutions to our clients’ needs.”