Global reinsurer Swiss Re’s latest Sigma study underlines the benefits and value of parametric insurance solutions for the corporate sector, products the firm says supports the narrowing of protection gaps, as well as providing protection for the increasing scope of intangible assets held by companies.
The consistently evolving economic environment continues to drive changes in the global risk landscape, and the corporate sector has been one of numerous industries that has felt the impacts of rapid change.
Reinsurance giant Swiss Re, in its latest sigma study, ‘Commercial insurance: innovation to expand the scope of insurability,’ notes the transition of a corporate sector once dominated by physical assets to services mostly with intangible assets, including the likes of intellectual property, networks, platforms, data and customer relationships, and so on.
Parametric solutions, which are designed to trigger rapid payouts of pre-arranged funds based on predetermined parameters being met, such as wind speeds and volume of rainfall, for example, are one risk transfer solution that can help corporates access insurance cover for intangible assets, as well as risks that were previously deemed uninsurable, says Swiss Re.
Swiss Re’s Chief Economist, Kurt Karl, commented; “New types of solutions are providing protection against a wider range of perils, and extending insurance cover from tangible to intangible assets.”
Parametric, or index-based insurance or reinsurance protection is common in the insurance-linked securities (ILS) industry, and are typically based on the physical measurement of hazards, such as earthquakes, hurricanes, and temperature variations.
However, Swiss Re feels that the main advantages of parametric solutions mean it’s a good fit for corporates looking to offset earnings volatility and other exposures, both including and absent physical damage.
“The biggest advantage of parametric triggers are their clarity and neutrality: an insurance pay-out is triggered if pre-set conditions are met, providing a quick, pre-agreed pay-out without a lengthy claim investigation.
“For this reason, parametric solutions are particularly useful in managing earnings volatility or for business interruption type coverage, with or without physical damage to property,” explains the sigma report.
Ultimately, Swiss Re highlights the potential for parametric solutions to provide coverage where traditional insurance or reinsurance protection creates a protection gap, such as policy extensions or sub-limit exposures. Furthermore, Swiss Re notes the ability of parametrics to provide coverage for risks that were previously viewed as uninsurable.
The ILS market is very familiar with parametric solutions, and as such investors in the space are more than willing to provide capacity for these types of solutions that are expected to be more in demand as corporates’ risks evolve alongside the global economy.
There is already a recognition that parametric solutions backed by the capital markets can provide a new way to insure against business interruption and contingent business interruption risks, from natural disasters, or other specific events that can be parameterised.
Such solutions offer a way for the insured to guarantee capital liquidity right when it needs it, when the right parameters connected to a risk it fears most have occurred. Using parametric triggers and ILS capital can turn these risks into something both insurable and importantly investable, providing a way for large corporates to protect themselves against risks the traditional markets have often shunned.