May 5, 2021

Reinsurance News Speed of payment, trigger certainty and the potential for much lower basis risk than the traditional insurance product, are three of the main competitive advantages of parametric insurance, according to industry experts. Last week, the Artemis Live series of interviews and webcasts with leaders and experts from across the re/insurance and insurance-linked securities (ILS) sector, hosted a webcast on parametric insurance in partnership with the Weather Risk Management Association and supported by our kind sponsor Descartes Underwriting. Titled, The Power of Parametric Solutions for Climate Resilience , panellists explored the past, present and future of parametric risk transfer as adoption for this type of coverage continues to gain traction. As many of our readers will know, parametric insurance offers rapid payout post-event as coverage is designed to trigger once predetermined parameters are met, such as wind speed at a certain location or a set amount of rainfall, for example. “Parametric product pays out 30 days, 60 days, and basically in the same accounting year as the loss, that is very important for a CFO. Traditional insurance pays out at best in year-end plus one, and sometimes for complex BI claims end plus two,” said Alain Lagesse, Director Group Risk Management, LVMH. According to Lagesse , speed of payment is one of three main competitive advantages of parametric insurance when compared with traditional indemnity structured protection. With the other two factors being lower basis risk and trigger certainty. “If you set the triggers correctly and it’s a big if, because a lot of the work on parametrics has to go into the setting of triggers correctly so you get the payment when you need it. So, if you get that right, then the basis risk for a parametric product is much, much lower than the basis risk for a traditional insurance product,” he said. Adding, “A parametric product, again if set up correctly, is very straightforward. If the triggers are met, they payout, period. The term sheet typically is six or seven or eight pages, as compared to 60 or 80 or 100 pages of a traditional policy. And a traditional policy is subject to contract interpretation because it’s a legal document, and that contract interpretation is after a big loss. And it’s interpreted by two, maybe would call conflicting parties.” The panel agreed that while parametric insurance is nothing new, the landscape in the space has changed quite a bit over the past few years. “It’s really the advent of advanced technologies in the satellite, radar and the ground sensor areas, and the data that we can derive from these has really greatly helped us not only to improve our analytical and pricing capabilities, but also have allowed us to really build models that can deal with the ever evolving landscaping of climate risk,” said Daniel Vetter, Head of North America, Descartes Underwriting. Fellow panellist Julian Roberts, Managing Director, Risk & Analytics at re/insurance broker Willis Towers Watson (WTW), also highlighted the importance of data and technology. “The immediacy and the availability of those data are incredibly useful. The analytical firepower that enables us to work with that data and some advanced modelling, again, transforms the utility of that data, which is all about solving client problems. And, I think probably one thing that has helped the managers go down this route is managing away things like basis risk. “So, increased sophistication of analytics, application of data, immediacy of the data, all these sorts of things has enabled the solutions that we are now able to develop, to be much more sophisticated and sort of narrow that sliver of basis risk down to a more practicable size and comfort,” explained Roberts. As well as advances in data analytics, another recent trend discussed by the panel was the evolution of market participants as more and more non-re/insurance organisations look to participate. “So, folks like Swiss Re, Munich Re, Allianz, they’ve been out there working this market pretty hard. Over the past year though, we’ve seen a lot of hedge funds approaching the market. And a lot of them are sitting on the sidelines right now, but they’re investing significant amounts of money in building weather desks, where these guys are planning on taking on weather risk and doing some speculative trading. So that’s quite a development,” said David Whitehead, Co-CEO, Speedwell Weather. Whitehead also told the audience that undoubtedly, “renewables is on fire” within the parametric risk transfer space. “It’s primarily Europe, followed by Australia and the US. And what’s happening is, we’ve put out new indices, and we call these our wind power production indices. So, it’s an index that’s based upon the weather, so it’s based upon wind, but it’s converted to megawatt hours. And we’re seeing a lot of use of these products by wind farm operators. So, these guys are hedging against not enough wind. But then we’re also seeing interest from the traditional energy markets, because they’re worried about too much wind unexpectedly,” said Whitehead.