As interest in and use of parametric forms of insurance and reinsurance risk transfer continues to increase, broker Willis Towers Watson notes that prices for coverage have been on the rise in the United States, but so too is available parametric capacity.
Parametric forms of risk transfer are increasingly used as complementary coverage, or replacements for the catastrophe and weather exposed components of risks and programs, and the challenging property insurance market in the US, as well as the COVID pandemic, have been driving part of the uptake increase.
Often these solutions are used to fill deductibles, top up sublimits or cover uninsured risks (such as non-damage business interruption risk), insurance and reinsurance broker Willis Towers Watson (WTW) explained in its latest Insurance Marketplace Realities 2021 spring update.
Interestingly, given the catastrophe and severe weather exposed nature of most parametric insurance solutions, it seems that while their pricing has been rising, it has not been moving at the same pace as some areas of the US commercial property insurance market.
WTW says in its report that pricing for parametric natural catastrophe (nat cat)/weather programs is up +5% to +10%.
While pricing for so-called challenged property, so the loss affected and catastrophe exposed, has typically been rising much faster than this.
One reason might be the highly calibrated nature of a parametric trigger, providing much greater certainty of what can cause a loss, as well as what that loss might be, given the all of nothing payout nature of many parametric solutions.
For the coming hurricane season, WTW urges clients to buy parametric hurricane protection early again in 2021, “to access optimal pricing and capacity, as last year the broker noted that it saw “rates increase and capacity disappear as we approached wind season.”
Markets are working to increase available capacity for 2021, WTW explained. Which may present an opportunity for those ILS fund markets with an appetite for parametric risk.
WTW also comments on the parametric weather risk transfer space, where it says these products are, “increasingly being adopted by insureds to hedge against non-damage business interruption events, especially with growing concern over climate change.”
Here, capacity is seen to be on the rise, as “Insurers are keen to expand this sector to diversify their natural catastrophe concentration in their portfolios and protect against loss resulting from warm northern hemisphere winters.”
Finally, WTW explained that as technology advances, the use of parametric risk transfer is becoming more targeted and also useful.
“Advancements in technology continue to expand the number of risks that can be addressed on a parametric basis. Emerging products cover hail, flood/surge, river height, lightning and wildfire risks,” the broker explained.
While next-generation indices are also helping, with data such as on footfall one input used, and clients own production data used to help settle contracts for business interruption covers as well.