A new report from Airmic in collaboration with reinsurance giant Swiss Re’s commercial insurance arm and insurance and reinsurance brokerage Marsh, highlights the potential for parametric re/insurance solutions to become more mainstream in the commercial space.
Parametric insurance remains more common place in the alternative reinsurance, or insurance-linked securities (ILS) sector, often utilised within catastrophe bond transactions to provide certainty of coverage and rapid payout once triggered.
Unlike more traditional forms of insurance, parametric solutions are structured to payout when a pre-defined and pre-agreed occurrence or movement in an index takes place, removing any need to assess the exact cause of damage or to fully understand the extent of the damage by having feet on the ground.
In developing parts of the world that are susceptible to adverse weather events, which often threaten to severely disrupt agricultural communities, parametric solutions provide rapid payout once a qualifying event takes place, such as a hurricane passing through a designated area at a designated intensity, for example.
The new report from Airmic, in collaboration with Swiss Re Corporate Solutions and Marsh, underlines the potential for this type of insurance to be used more in the commercial insurance sector.
Airmic Research and Development Manager, Georgina Wainwright, commented: “This is an area of insurance that has the potential to grow rapidly, both in terms of the extent of its application and the number of companies that use it. It can provide more options and ultimately ensure that insurance becomes a truly strategic purchase.”
The report states that parametric solutions can include wider and more bespoke coverage, as well as the aforementioned rapid, and more predictable payout. At the same time, risks that traditional insurance has previously found difficult to insure, such as disruptions caused by pandemics or ash clouds, for example, can be protected via the use of a parametric trigger structure.
According to the report, some risk managers are now using parametrics in the travel, retail and agriculture sectors, adding that this could be used more widely and to protect against intangible assets and the risk of cyber-damage, for example.
Christian Wertli, Head Innovative Risk Solutions as Swiss Re Corporate Solutions, said: “Concerns about large, complex risks directly related to business operations are on the rise – it’s about protecting revenues. Parametric solutions can be used as a business tool to provide certainty and speedy access to liquidity when most needed. Risk managers are enablers and we can work together to develop highly bespoke protection.”
The report does warn insurance buyers that are looking to go down the parametric route that some challenges might arise, with some carriers potentially needing to acquire new skills. At the same time, the fact parametric cover tends to be wider, means the data demands are different and it can be more expensive than more traditional forms of cover.
Steve Harry, Risk Finance Consultant, Financial Solutions Group, Marsh, added: “Parametric insurance solutions can help firms reduce uncertainties around cover and cashflow arising from traditional policies and form part of their financial protection. For risk managers, taking the time to understand their firm’s ability to withstand future ‘shocks’ and gaining the support of the board are crucial first steps to incorporating parametric insurance solutions into their overall risk management strategy.”
Paul Goulding, Airmic Chair, said: “Parametrics is still work in progress, but I can see it becoming mainstream in the future, because it offers certainty of timing and hassle-free payment.”
While another risk manager and Airmic Board Member, Claire Combes, added: “I am excited about the ability to access parametric solutions. I believe they will increase the opportunity for a large organisation such as ourselves to be more dynamic in our risk transfer, in particular the ability to access more coverage in relation to non-damage business interruption.”