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Do COVID and climate concerns trigger growing parametric interest?

14.07.22 The Big Question

With Megan Linkin, senior parametric natural catastrophe underwriter and Cole Mayer, senior vice president – senior structurer at Swiss Re Corporate Solutions.

Growing risks across the global supply chain show no signs of abating and they come at a time when climate change is rapidly increasing the frequency and the severity of natural catastrophes and perils.

From hurricanes, floods and, more recently, heatwaves and deadly temperatures in regions across the world, the impact of global warming is become ever more evident.

Yet alongside rising accumulations and exposures, the industry and its clients are looking for innovative solutions that can be used to mitigate the changing risk environment.

Over the past 20 years parametric covers, which will pay out a set amount when an agreed trigger is reached, have been available. However, they have traditionally been used for specific natural peril risks and for the basis of much of the industry’s efforts to bridge the protection gap in the developing, and often catastrophe prone, economies where those who need it most can least afford the price.

The development of microinsurance has also been predicated on the use of parametric triggers, but the industry has still struggled to broaden the range of risks that can be met here.

However, the past three years have seen a sea change in the way in which parametric solutions can be used.

A better use of technology and access to greater levels of data have created a platform which is allowing underwriters to look to the type and scope of solutions that can be developed.

As Linkin and Mayer explain in answer to this week’s question, the industry’s work to educate brokers and their clients as to the benefits that can be delivered from parametric solutions is finally bearing fruit.

In world which has been defined by uncertainty, the clear triggers and swift payments that parametric solutions can deliver are growing in attraction and the access to data is opening new areas where the solutions can be effective.

Adrian Bastow, Head of Marketing, AdvantageGo

For Megan Linkin and Cole Mayer, the parametric market is starting to see a period of tangible growth in demand. It has been driven by a sizable rise in the number of corporate clients who are now willing to consider the use of parametric solutions for a wider range of risks.

The ongoing issues with global supply chain, and the rising threat from business interruption and contingent business interruption, is testing the global economy, but at present there has to be physical damage in order for the traditional products to respond.

COVID and the rising risk of natural perils caused by the world’s changing climate have made supply chain risks ever more difficult to cover, and traditional BI and CBI markets have tightened limits in response.

This has left some clients in a tough spot when it comes to addressing their risk needs.

However, there is now a recognition that parametric cover may be the answer to the requirement to fill in the gaps with the more traditional BI and CBI coverages. The issue, however, is the ability to independently record the financial impact that may have been sustained, in order to create the necessary matrix on which a trigger can be based.

Linkin says the ability to meet the challenges of emerging risks in areas such as climate change and natural catastrophes are easier as we have the data and the experience to create parametric solutions, having done so in catastrophe exposed areas such as Asia.

They are also being used to cover what have been traditionally difficult to insure assets and the financial costs which are difficult to quantify in the traditional sense.

However, if as a business understands the risk and the peril it is better able to create a solution that will best respond to the challenges faced.

Mayer adds that risk managers believes if a firm can access a tool which will respond if it is needed, and will pay an agreed amount if the event reaches the agreed trigger, it may be viewed as preferable to an elongated claims process to identify specific loss values.

Granular data

In recent years the level of data has become far more granular and as such it has enabled parametric solutions to become far more precise.

The use of seismic and saturation data is now far more reliable, and we are seeing the use of high resolution systems to better map event footprints, delivering the ability to be more precise in the establishment of the parametric triggers and their risk levels, explains Mayer: “We can also identify exact locations to further define the impact zones.”

The industry has also developed the ability to offer non-peril and secondary peril solutions such as a parametric hail product that utilises high definition hail footprints which allow the client more flexibility.

This higher level granular data allows the underwriter to price with a greater degree of certainty and with a more specific response at the time of a claim.

Esoteric risks

“We are seeing more demand for esoteric risks, but we have to ask ourselves does it correlate with the risks as we understand them, can we correlate the risks, does data tell us enough about the risk and do we have the risk appetite?” adds Linkin.

“It not only the type and classes of cover where we are seeing a broadening in the range of enquiries,” she adds. “The same can be said of the brokers and the clients which are now willing to consider parametric solutions to their risk needs.”

“We are seeing brokers of all sizes and the same can be said of the size of their clients.

It started with the very large corporate clients and in many ways, they still have that first mover advantage, but we are now reaching an inflection point in terms of the understanding of what parametric solutions can offer,” Mayer adds. “There has been a significant effort around the education of the market and we are seeing a much wider acceptance by clients as to the use of parametric to meet their risk needs.”

The Big Question is supported by AdvantageGo, which provides revolutionary commercial insurance and reinsurance software solutions. Harness the power of proven, functionally-rich core solutions.

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