While parametric insurance will never replace indemnity structures, they are expected to be leveraged more widely in areas where indemnity models struggle to provide adequate solutions, according to Richard Chattock, Chief Executive Officer (CEO) at London-headquartered, Insurtech Gateway.
On the final day of the virtually held ILS Bermuda Convergence 2020 conference, attendees heard from a panel of insurance-focused venture investors from across the re/insurance and insurance-linked securities (ILS) markets.
Moderated by Hanni Ali, SVP, Strategic Partnerships at Hamilton Insurance Group, the panel included Chattock, alongside Lyndsey Toeppen, formerly Sandbox Insurtech Ventures; Adrian Jones, Deputy CEO, P&C Partners, Ventures & Strategic Partnerships, SCOR; and George Alayon, Assistant Director, Supervision (Insurance), Bermuda Monetary Authority (BMA).
As technology and analytics continue to advance at a rapid pace, the discussion explored the insurtech opportunity for the ILS investor community. Distribution, underwriting, operational efficiency and data transparency were debated at length, as panellists noted an ongoing need for innovation in an ever-changing environment.
“Maybe I’m an optimist, but I believe that insurance will become a more efficient business and risk transfer will become more efficient,” said Chattock.
“Insurance is, I would say, dragging its feet generally in terms of its ability to change and become more efficient. So, I see there’s a huge opportunity there for technology and the incumbent players, as well as new players to drive efficiency into the value chain through lots of different mechanisms,” he continued.
According to Chattock, one of the most promising mechanisms to deliver greater efficiency is parametrics, an area in which his company invests heavily.
“We think from an insurers point of view, it is a far more efficient way to write insurance. It is both efficient from a perspective of issuing policies, claims handling, and all of those aspects but equally, it’s far more efficient from the capital you’re holding on your balance sheet perspective. You’re not carrying large loss reserves, you’re not carrying post loss inflation assumptions,” he explained.
While parametric insurance is certainly nothing new, it is growing in popularity, especially in places where more traditional, indemnity-based models find challenging. The benefits of parametrics, underpinned by rapid payout post-event, are well known in the ILS space and often leveraged by entities such as the World Bank to enable the transfer of natural catastrophe risk from government balance sheets to the capital markets.
“Everything can be algorithmically or mathematically calculated to a pretty fine degree, based upon your models and you’ll rapidly find out if your models are right or wrong,” continued Chattock. “So, that we see as a big way of driving a reduction in expense and better for all people in the value chain – customers, policyholders receiving their money when they really need it, and insurers.”
In response, SCOR’s Jones said that while there are circumstances in which parametric structures can certainly be useful and valuable, for example by getting cash into the hands of those that need it most in order to keep them liquid soon after an event, he’s a strong believer in the indemnity product.
“I think that if people have the option, they want to have their losses covered very precisely. And you see that in the ILS market, where seven or eight years ago you saw a much greater market share of ILWs and index-linked products and parametrics, and now, as the market got soft, you saw a big shift towards mostly being indemnity based.
“And, so, I think that actually, despite all the problems with insurance and despite all the issues around expenses and things like that, ultimately, I think people just want to have their losses paid and paid as precisely as possible,” said Jones.
For parametrics to really gain traction widely across the risk transfer space, Chattock accepted that it is going to take some time and also stressed that parametrics will not and should not replace indemnity models.
“But I do think they will grow importantly in spaces where indemnity models don’t pay losses, right. I mean, they don’t pay for uninsured, or non-damage business interruption, for instance, they don’t pay for denial of access losses, or don’t often, and there’s lots of different coverages which indemnity models find difficult to address, and that parametric models can address very easily,” said Chattock.
Interestingly, Chattock went on to explain that there could well be scope for the purchase of an indemnity and parametric policy together, and that arguably, there are some elements of parametric within some existing indemnity models.
“And, I see that as growing as well, to meet some of those gaps essentially in the indemnity model,” said Chattock.