Parametric risk transfer interest drives innovation, but consolidation possible

Rising interest in parametric insurance and risk transfer has resulted in an influx of investor capital into the space, the development of new MGA’s and capacity, as well as new technology platforms.

While this is driving innovation in the parametric risk transfer space, the market is only so big for parametric products at the moment and analysts at brokerage and consultancy WTW believe consolidation could be ahead.

We’ve seen some really significant investments into parametric insurance and risk transfer start-up and scale-up companies in the last couple of years, with the wave of investor interest in insurtech helping to fuel some of the pent-up investor demand for this segment.

But the overall size of the parametric risk transfer market has yet to expand at a rate that would support all these new entrants, or deliver the multiples some of the investors are going to be looking for.

In a recent report WTW explore some of the trends in the parametric risk transfer market, saying that the parametric market continues to receive a lot of attention.

“While this appears to duplicate capacity providers, it also disrupts established deals and pricing and drives innovation,” WTW explained.

Adding that “technology continues to drive product refinement” in the parametric risk transfer space.

Insureds are gaining an increasing understanding of the limitations of traditional insurance or reinsurance products for property and related protection.

At the same time, they are realising the broader potential ESG apprpaches of alternative forms of risk transfer, WTW believes.

Parametric risk transfer is increasingly moving into perils such as flood and hail insurance, while applications for perils like tornado are also becoming more prevalent and network outage is another solution on offer that can now utilise a parametric trigger.

In the main, the use-case for a parametric product continues to be as a complement to property insurance, to fill on deductible gaps in coverage, to top-up sub-limits, or for covering uninsured risks such as non-damage business interruption, WTW noted.

However, the core premise of parametrics, that they can respond quickly and cleanly to a loss and make for rapid claims payouts, also remains important to protection buyers.

While parametric risk transfer has clearly been in-fashion over the last few years, helped by the wave of interest in insurtech, WTW’s commentary suggests concerns the market may not be growing fast enough to support all its participants now.

While investor capital is driving MGA formation and technological innovation, “We are conscious, however, that these MGAs often access the capacity of established parametric markets,” WTW said.

As a result it believes, “This could suggest that this market will see consolidation in the future.”

Investment capital flowing into the parametric risk transfer space has likely been as much as doubling each year, over the last five perhaps.

At the same time, actual premiums underwritten on a parametric basis have been rising far more slowly, our sources suggest.

With well-funded start-up and scale-ups in the parametric space building out large operational footprints, but still the most active writers being quite lean and focused in terms of reach, we’re likely to see quite a battle emerging for premium in this space, as the well-funded seek to deliver on the returns their investors will be demanding.

This is where consolidation may come into play, as some may be pushed to look at exit opportunities, making for potentially attractive buying conditions for larger players, such as global insurance and reinsurance firms.

There remains a challenge in educating insurance buyers and getting the word out about parametric options.

In order to grow parametric portfolios significantly, expert sales persons and deep broker relationships will be required, as well as education for brokers too.

Core to the expansion of parametrics will be risk modelling as well, as until buyers can easily compare options of indemnity versus parametric, and how differences would affect them in the event of a loss event, it will remain a more challenging product to sell in many cases, where there are direct comparables.

This is where innovation comes in though, as parametric triggers can cover risks that are not insured today, or where insurance struggles to price itself efficiently, providing an opportunity for advanced technology and data analytics alongside parametric triggers to gain a foothold in some markets, or to create entirely new categories of risk transfer products, or unlock climate change related risk transfer.

That is where the multiples private equity and venture investors look for will be found, but not every parametric company will be capable of unlocking those opportunities making consolidation and also failure a likely feature as this market continues to develop.