Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Risk managers & C-Suite lack understanding of parametric risk transfer


The insurance and reinsurance industry has much more to do to promote parametric risk transfer and other alternative risk strategies, as both risk managers and the C-Suite of major corporations lack a clear understanding of its benefits.

tape-measureThe increasing availability and abundance of data and advanced analytics tools, combined with alternative risk financing mechanisms, can provide an opportunity to risk managers.

Parametric triggers can bridge the gap between the two.

But many are unaware of the benefits of alternative risk strategies, such as parametric risk transfer, a report released recently by brokerage Marsh states, suggesting the insurance and reinsurance industry needs to do more to sell these products effectively.

Marsh explains that the operating environment for risk managers right now is “rich in data that when combined with growing alternative risk solutions can result in more robust risk finance strategies and more resilient organizations.”

However, use of data and advanced risk transfer strategies remains out of reach for many risk professionals, as there remains a “general lack of understanding of available alternative risk solutions and effective use of data and analytics” which is holding back risk managers from maximising this opportunity.

47% of risk professionals rank the use of data as their number one priority for improving their risk management capabilities, but it seems this isn’t within the triggers of their insurance protection yet, as understanding of parametrics is lacking.

Despite clear and growing interest in some alternative risk solutions, such as structured risk programs and parametrics, Marsh says that many respondents to its survey remain unfamiliar with the concepts and the benefits they can offer to their risk management programs.

Marsh’s survey shows that 33% of risk professional respondents and 53% of C-suite respondents admit they need to learn more about alternative solutions before making any decisions about their use, or otherwise.

That suggests education is sorely lacking on these advanced risk transfer product structures, which at a time when data and analytics are so key and abundant suggests a missed opportunity of significant size, for the risk professionals and their C-Suite executives, as well as for insurance, reinsurance and of course insurance-linked securities (ILS) providers.

Marsh believes that here data-driven modeling will assist, allowing risk professionals to better understand and compare traditional and alternative risk transfer solutions.

“By effectively marshalling data and risk modeling tools, organizations can better understand changes in their risk profiles and risk bearing capacity allowing them to access the opportunities presented by the growing levels of capital available for risk finance,” explained Brian Elowe, North American Chief Client Officer, Marsh.

Carol Fox, Vice President of Strategic Initiatives, RIMS, also commented, “Expectations for risk management professionals to deliver strategic solutions has never been greater. Now is the opportune time to integrate new technologies for accessing ‘real time’ data to inform business and risk-taking decisions, as well as lead in the development of innovative finance solutions to transfer risk.”

The maturation of data analytics, artificial intelligence, machine learning and other technologies will all add to the ability of the industry to more accurately calibrate parametric triggers, in order to make the insurance or reinsurance coverage they provide more responsive and reduce the basis risk associated with them.

It’s time the C-Suite of the corporate world understood this opportunity to transform their risk management programs with quick-paying parametric protection. Companies such as New Paradigm Underwriters (recently backed by TransRe), AXA, Swiss Re, Descartes Underwriting, among many others, are all specialists in provision of advanced parametric protection products that many large corporate buyers would benefit from.

Marsh’s report also highlights the usefulness of alternative risk products including parametric insurance, as better able to cover hard-to-insure exposures, which respondents noted as the top benefit of looking to alternative structures.

We’d add covering uninsured, as well as hard-to-insurer, as parametrics can cover gaps in insurance protection that major corporates have been living with for decades.

It’s telling that just 5% of those responding to Marsh’s survey said they had used parametric triggers, just slightly ahead of the 4% who claims to have used catastrophe bonds and only 3% who’ve used a dual-trigger risk transfer structure.

But the main blockers to adopting alternative ways of financing risk, were cited as the cost and the effort of explaining the benefits to the organisation, again suggesting the parametric risk transfer education job for the industry has only just begun.

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