Kalista Global, a Bermuda based insurance and reinsurance services firm with a focus on the ILS, catastrophe bond and alternative reinsurance sectors, is launching a range of re/insurance products which utilise parametric triggers. The product which Kalista Global says is “game-changing and innovative” is called Parametric Catastrophe Solutions. The property re/insurance product will initially target hurricane and earthquake cover due to the ready availability of data.
The new product from Kalista promises to save cedents money by helping them make savings on their windstorm and earthquake catastrophe insurance and reinsurance premiums through the addition of specific parametric triggers, based on the intensity of an event, to what would normally be treated as a “covers all” policy.
A traditional catastrophe insurance policy would feature a premium and deductible which are based on the probability of an event occurring, not on the actual magnitude or impact of that event. Kalista Global say that this can overestimate the potential losses of an event and is often reflected in a premium and deductible which are higher than necessary. By using parametric triggers which take into account the actual magnitude of an event and the probability of an event occurring at specified magnitudes or intensity, cedents can have coverage that more accurately calibrates the assessment of the risk and makes increased limits more affordable, according to Kalista.
Spencer Conway, Executive Vice President, of Kalista Global explained; “We are continually trying to innovate and think out of the box – this product offering is another example of that thinking. We think parametric triggers are going to play a much larger role in the industry going forward. For instance, if you look at a client’s risk profile for earthquake, the models will give you an extremely high probability for low to moderate magnitude earthquakes, often 100% probability every 250 years. However, in reality the high magnitude events are much less probable and therefore it can often be much more cost efficient to insure if you can define a more meaningful parametric trigger point so the client has the coverage needed, but with the premium instead reflecting a defined probability.”
Kalista intends to focus on hurricane and earthquake risks to begin with but it is likely that this could be expanded to include other perils if there is sufficient interest. “Initially the Parametric Catastrophe Solutions will encompass windstorm and earthquake exposures as these risks have a dearth of historical data which form the geographic probability”, commented Mr. Conway. “We believe this product offering will have tremendous appeal for clients looking to have a more efficient and sophisticated insurance program.”
The plan is for the product to be made available as insurance, reinsurance and retrocession covers, with a range of capital providers already lined up to provide the necessary underwriting capacity. The parametric nature of the product means that it could be well suited to capital market sources of capacity, and collateralized reinsurers are expected to appreciate the novel nature of the products. The product from Kalista is expected to work particularly well as a retro product where the cover could cut across all of a reinsurers clients, providing intensity-linked catastrophe cover on a location basis.
Kalista is targeting the Parametric Catastrophe Solution at companies with greater than USD$50m of total insured value and the solution has capacity limits of USD$80m, which they say allows for widespread client access to the potential savings. The Kalista team has extensive expertise applying and structuring Parametric Windstorm and Earthquake CAT solutions and can also be engaged on a stand-alone basis to advise they say. This announcement today continues Kalista’s innovative approach to re/insurance solutions. Late last year we wrote that Kalista launched a catastrophe bond issuance facility for anyone seeking to leverage the cat bond structure as a source of cover.
The press release from Kalista gives an example of the saving that can be made with the parametric product. For clients with properties that have been engineered to withstand the moderate magnitude events with zero to minimal damage, then a solution that is priced to only trigger at a high magnitude potentially becomes 20-70 percent more affordable for them, according to the release.
Kalista are also keen to point out that parametric covers could also be structured to respond to a client’s worldwide contingent business interruption catastrophe exposure, as a complementary cover to their core (re)insurance program.
Kalista hope that the launch of these parametric catastrophe re/insurance solutions at this time will get potential clients thinking about different sources of cover in advance of the Janaury renewals. Kalista hopes that re/insurers will see the potential in adding parametric solutions to their re/insurance programs and that they will see the benefit that a well structured parametric cover could bring to their peak risk transfer.
Of course the question of basis risk arises where parametric triggers are concerned, with questions always being asked about the potential difference between actual loss experience of the cedent and the payout of the contract if the trigger is breached. At Artemis we’ve always believed that there is a role for parametric triggers in insurance and reinsurance and that it really comes down to how they are structured, where they are used and education of the market. Parametric triggers force re/insurance brokers and underwriters to think differently and treat covers more like a hedge, on an option, than sometimes traditional covers are thought of.
Parametric insurance products are proving increasingly successful in the microinsurance world, where they provide cover for a range of natural perils. The Caribbean Catastrophe Risk Insurance Facility is another example of a large-scale parametric insurance facility which is operating successfully. A mind shift is required to think about re/insurance in a different way, where parametric triggers are concerned. The investor community has much less resistance to parametric triggers than they once did, and in fact capital market players are often more likely to understand the benefits of a well structured parametric policy than the traditional re/insurance market players (as they understand the option-like hedge qualities of a parametric trigger). Once cedents learn to look at parametric triggers as a complement to their traditional cover and work out how best to fit them within their existing programs, we think it likely that parametric products will become more prevalent again.