The use of advanced technology and improvements in data and analytics to develop innovative parametric triggers is a stimulating proposition, both in the natural catastrophe space and beyond, according to Jonathan Clark, Head of Public Sector at reinsurance broker Guy Carpenter.
In an interview earlier this year with Artemis around the launch of Guy Carpenter’s report: Protecting our Planet and the Public Purse, Clark discussed the potential for increased utilisation of parametric solutions and the insurance-linked securities (ILS) market, such as catastrophe bonds, to boost insurance penetration.
Parametric solutions, which are widely leveraged in the ILS space and by regional risk pools such as the African Risk Capacity (ARC) and the CCRIF SPC, to name just a couple, enable rapid payout post-event for some of the world’s most vulnerable people.
Structured to trigger when pre-determined parameters have been met, such as wind speed during a hurricane or an amount of rainfall at a specific location, these types of solutions do not require on the ground loss assessment and therefore a policy can be triggered and payment received far quicker than when compared with more traditional covers.
The use of parametric solutions has grown in recent times and this has happened alongside some significant advancements in technology. With this in mind, Clark explained to Artemis that the integration of new technology with parametrics is a promising proposition.
“Thinking about improvements in technology, improvements in data capture and all of that, and then how to utilise that information to structure new innovative parametric covers, that’s pretty exciting,” said Clark.
As noted by Clark, the utilisation of parametrics in the natural catastrophe arena is well documented and growing. It’s not uncommon for catastrophe bond transactions covering earthquake risks to be structured using a parametric trigger, for example.
Furthermore, InsurTechs alongside global risk transfer entities are looking at parametrics to drive up insurance take-up in areas like flood, with technology enabling the creation of more complex products.
Clearly, parametrics have a place in the nat cat space and it’s likely that these types of products will deepen their role in this part of the market. But, it’s not just the nat cat space that stands to benefit from these types of solutions, explained Clark.
“Where a client’s specific risk data might be difficult to collect and analyse in order to measure the physical risk an entity is holding to a high degree of confidence, a parametric solution might provide a solution,” said Clark.
Interestingly, he went on to highlight one area of parametrics that should be considered.
“While a parametric solution might simplify the communication of risk between buyer and seller thereby facilitating risk transfer solutions, that doesn’t mean the homework around these engagements stops there. Typically, when we’re working with our clients we’re doing a lot of supplemental analytics behind the scenes to ensure the parametric trigger, whatever it might be, is going to trigger when that entities needs it to.
“Where I think some of our public-entity clients get a little concerned is around ensuring that if they engage in risk transfer the solution will operate as planned. If a parametric trigger doesn’t activate when everyone else thought it should, then that is not a good result,” he said.
As a result, Clark told Artemis that Guy Carpenter ends up working extremely hard with its analytics division and the entity requiring cover, to make sure that the cover is structured in a way that minimises that kind of problem. The value proposition of parametrics is clear and wide-reaching, particularly when one considers the potential for advanced technology to enable the development of complex solutions for more complex exposures, in the nat cat space and elsewhere.
Keeping the potential application of parametrics in mind, Artemis questioned Clark on whether he felt that similarly, there was a place for catastrophe bonds.
“Absolutely,” he began. “Our advice, particularly when engaging with public entities that hold large risk portfolios , is if they’re going to engage with the reinsurance community, they should have relationships in both camps. They should have relationships with traditional reinsurers and they should have relationships through the ILS and the cat bond market. The key concept is to spread risk and broaden sources of risk capital.
“Unfortunately, we believe governments have focussed too much on debt, and funding their risk management with taxes. Too much of anything isn’t a good thing, particularly in the risk management area. It’s important to spread risk and by spreading risk more broadly, you will improve the ability to manage volatility and enhance resilience.
“Cat bonds are very good at doing that as is traditional reinsurance – both of these products have their positives and negatives which can come into play. These tools are only one component of a robust risk management strategy, but they are an important component,” said Clark.