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Original Risk: A Society for Change Agents

New Guy Carpenter unit to develop parametric risk transfer products


Global reinsurance broker Guy Carpenter has launched a new division named CAT Risk Studio (CRS), to support its Model Suitability Analysis (MSA)® initiative and work with capital markets team GC Securities to develop parametric catastrophe risk transfer solutions.

“We launched CAT Risk Studio in order to expand the capabilities of Guy Carpenter’s Model Suitability Analysis initiative,” commented David Lightfoot, Head of GC Analytics – Americas.

“Coupled with our innovative modeling technology and work by our catastrophe risk modeling teams around the world, Guy Carpenter’s MSA initiative truly has the potential to become the global reference for catastrophe risk knowledge in the market. Our team has worked tirelessly over the past three years to design the MSA framework and develop a growing academic research network to support our clients’ desire for defensible confidence in the CAT modeling results that are increasingly being used to inform capital management and underwriting decisions,” Lightfoot continued.

The development of parametric products for catastrophe risk transfer is seen as an opportunity for the insurance, reinsurance and insurance-linked securities (ILS) industries, as parametric structures are expected to support the future catastrophe risk transfer and insurance needs of the insurance industry and corporations alike.

In a world where there is an increasing emphasis on catastrophe and weather risk resilience, the use of parametric triggers and insurance products is seen as one way that the large global corporations of the world can take more responsibility for protecting themselves, their employees and their global supply chains.

Working closely with the GC Securities, investment banking, ILS and capital markets unit, will ensure that any parametric risk transfer products developed can tap into the strong appetite of ILS investors to support catastrophe risk transfer.

Parametric structures are seen as desirable by many large ILS investors, who appreciation the transparency and simplicity of the trigger. Parametrics also aid portfolio construction and diversification and show more promise for breaking into emerging markets than indemnity protection, particularly where there is little or no insurable interest to date.

Of course, parametric structures are also suitable for use by large insurance and reinsurance companies as well, but this does require the cedents to come to terms with basis risk, or to think differently about how they buy reinsurance or retrocessional protection.

A great example of this is the recent use of a parametric trigger in AIG’s six month U.S. wind catastrophe bond transaction, Compass Re II Ltd. (Series 2015-1).

Parametric features within insurance contract design have also seen great success in the index insurance market, where simple products with a trigger based on actual weather conditions are used to bring insurance to some of the poorest people in the world.

Guy Carpenter’s MSA initiative provides rigorous, systematic assessment of the many available catastrophe models worldwide and is designed to help clients formulate a confident view of catastrophe risk.

Headed up by Guillermo Franco, Global Head of CAT Risk Research, the initiative executes established tests, including the comparison of catastrophe model assumptions with independent data sets. MSA identifies a specific model’s strengths and weaknesses, while also allowing users to fine-tune their own tolerances for risk in order to evaluate a model’s result.

The CRS division will be based at the recently announced Marsh & McLennan Innovation Centre in Dublin, Ireland.

Also read:

Parametric triggers can ensure business interruption recovery: Marsh.

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