Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Significant opportunities for parametric growth, say Descartes execs


Recent developments in the re/insurance and ILS markets have resulted in a significant expansion of parametric solutions, and executives at Descartes Underwriting believe many opportunities for further growth are now available to companies offering these kinds of products.

descartes-underwriting-logoTanguy Touffut, CEO & Founder at Descartes Underwriting, and Edern Le Roux, Head of ILS and Nat Cat Modelling, recently spoke to Artemis about the potential for greater use of parametric triggers, particularly surrounding catastrophe risk.

Touffut noted that the traditional industry is currently facing a hardening of the cycle, at least for some lines of business and some geographies.

Consequently, he suggested, there may be an opportunity to increase parametric insurance penetration, partly due to its more affordable costs, as well as the option for it to be tailored to a client’s budget or wrapped around an indemnity cover to bridge the protection gap.

“In addition, parametric insurance can provide risk carriers with certainty on potential losses quickly after the event,” Touffut told Artemis.

“Risk carriers have been suffering from creeping losses in Japan, the Gulf of Mexico, and in the US this hurricane season, hence reducing their risk appetite for traditional indemnity insurance covers,” he explained. “It is no surprise that these locations are currently the most significant in terms of parametric insurance take up rate.”

Launched in February 2019, Descartes Underwriting is a start-up insurance technology managing general agency (MGA) with a focus on parametric and data-driven risk transfer products and ambitions to use the ILS market as a source of capacity.

The firm has observed an ongoing expansion in the reach that risk-based index-based re/insurance can achieve, as parametric solutions have slowly expanded beyond their original focus on Agriculture and Energy sectors in recent years.

Moreover, the Descartes execs asserted that new innovations and growing acceptance have created a divergence between sophisticated and emerging parametric markets.

This has been further fuelled by the private-public partnerships that have arisen and given parametric re/insurance the support of government and supranational unions, such as the World Bank.

“There has been a significant growth rate in many other markets and across several sectors like construction and transportation,” Touffut said. “And it is the companies that provide constant innovation and flexibility that will be able to benefit from this expansion of parametric insurance in these new sectors.”

Asked whether Descartes sees parametric triggers as a replacement to indemnity triggers, the executives acknowledged that they had seen some large companies completely switching from indemnity to parametric.

However, over the last two years, the firm has also observed that parametric covers are increasingly being underwritten to cover non-damage business interruption (NDBI) costs that may not be covered by the indemnity-based policy.

In such cases, parametric covers can be complementary to the traditional policies, for example by covering the deductibles of traditional insurance programs.

“NDBI is a growing market as risk managers get an even broader mandate within organizations,” Touffut stated. “They are not only focusing on protecting their company against property damage, but also against financial losses that could dent the company’s profits or revenues.”

Whereas five years ago, risk carriers mainly pushed for parametric products to get rid of moral hazard and anti-selection, today Descartes sees demand coming from large corporations looking for a swift claim payment and more transparency.

“Large companies are behaving increasingly like individuals in a digitized world: they are looking for simplification and do not accept to wait when they face a claim,” Touffut noted. “In addition, several large ILS funds are offering progressively more capacities through a parametric format.”

Edern Le Roux also spoke to the potential for primary insurers to use parametrics as a corporate risk transfer protection alongside their reinsurance programs.

“We think that parametric reinsurance will be driven by the growth of parametric insurance because basis risk remains an issue,” Le Roux told Artemis. “As parametric solutions become finetuned and the basis risk is reduced it becomes easier to gain momentum in the market for both insurers and reinsurers.”

However, some experienced primary insurers have also been using Industry Loss triggers to reinsure a portion of their risks notably using cat bonds, he added.

These players are generally accustomed to dealing with the basis risk between their actual losses and their reinsurance recoveries, so using a parametric trigger can just be seen as going a step further, with the possibility for reinsurance costs savings.

Nevertheless, Le Roux warned that due to the increased basis risk, parametric triggers must be used cautiously and should remain a reasonable portion of an overall reinsurance program.

As parametric insurance continues to account for a larger share of corporate risks underwritten by insurers, the parametric portion of the risk can be reinsured through parametric reinsurance contracts with no basis risk, Le Roux went on.

“Some ILS funds will also contribute to the growth of parametric insurance as reinsurance,” he stated.

In terms of a form of protection against major storms, Le Roux suggested that parametric reinsurance may be able to offer reinsurers greater transparency on the potential losses of specific events.

“In other words, it is much easier to estimate the impact of 200-year events and the associated capital requirements,” he explained. “It is a way to avoid ‘bad surprises’ such as creeping losses and to reduce the volatility of financial statements.”

However, Le Roux also mentioned that using a parametric trigger for retrocession may be challenging for some companies, as it requires reinsurers to have a strong knowledge of the portfolio and how it will react to certain events.

He commented: “For the most sophisticated carriers that are able to correlate physical parameters with their actual losses, they can add a parametric portion to their retrocession program in order to reduce their retrocession budget as parametric covers are less expensive than retrocession covers especially in the actual pricing environment.”

As a concluding remark, Touffut emphasised that parametric insurance must continue to work with innovation and flexibility to be able to face the increasing intensity of natural hazards.

While new products have emerged that help to create a better customer relationship, everchanging climate conditions will necessitate a constant renewal of parametric hurricane and typhoon solutions, he argued.

“It is not only the innovation from the supply side, but also the flexibility from public entities that will drive parametric insurance,” Touffut said. “Natural catastrophes can severely impact a countries population and GDP, and some Caribbean countries are extremely susceptible to natural catastrophes while simultaneously not having enough insurance coverage to build resilience against catastrophic events.”

“However, governments are increasingly adapting legislations to include parametric insurance options as these provide a fast and transparent solutions to “bounce back” from adversity. This shortens the insurance gap in these vulnerable countries,” he continued.

“For example, Puerto Rico has issued new legislations that strive to include parametric into microinsurance covers for persons of low income to recover quickly from the financial losses brought by these catastrophes.”

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

Artemis ILS Asia 2023 - Insurance-linked securities conference in Singapore

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.