Parametrics set to play more prominent role at 1.1 renewals
Parametric covers are expected to play a more prominent role in the January 2025 reinsurance renewals, but panellists at The Insurer’s Pre-Monte Carlo Forum in London were in disagreement as to whether increased uptake represented a permanent shift or cyclical trend.
Asked whether this year’s Rendez-Vous would be abuzz with talk of parametric retro and XL layers, Arch’s Maamoun Rajeh said he thought it would.
“I do believe that it will get more traction going forward,” the Arch Worldwide Reinsurance Group CEO commented, adding: “I do believe it’s got a prominent place to play in our business.”
Parametric policies pay out pre-agreed amounts based on trigger events monitored by third parties, such as hurricane wind speeds across a portfolio, rather than the value of losses. “On the one hand, you’ve got the basis risk,” noted Rajeh, “but it’s very attractive that you don’t have to do a ton of work with displaying your data and putting your data out there.”
David Howden, CEO and co-founder of Howden Group, noted two benefits of parametric coverage. “It is attractive for clients, it is simple, it is accessible. They understand it, they can trust it.
“But I think we’ve talked a lot today about getting capital in this market, and I think capital likes parametrics as well, because, again, it’s something they can model and understand well.”
Rajeh and Howden agreed that product innovation was one of the drivers of increased parametric adoption. “There’s a lot of innovation around the product. The product’s gotten broader across multiple lines of business as well,” said Rajeh.
Howden added: “It has been around for a long time. But what hasn’t been around a long time is, in essence, the technology, the data to really utilise it. I think that’s the big shift.”
Ark CEO Ian Beaton struck a different tone, saying of parametrics: “I think it’s just a cyclical response to pricing.”
Grouping parametric products with other index-based solutions such as county-weighted industry-loss and state-weighted industry-loss products, he said: “Fundamentally, what you’re swapping and trying to price is basis risk for UNL [ultimate net loss] cover.”
Beaton said the decision to buy parametric cover was often based on whether, as reinsurance prices go up on a UNL basis, parametric cover is available at a cheaper price in parts of the market.
Tackling the protection gap
The speakers also discussed the role of parametrics in extending coverage to areas underserved by insurance. Beaton highlighted how risk pool CCRIF SPC (formerly the Caribbean Catastrophe Risk Insurance Facility) has helped governments cover critical infrastructure and emergency response costs after natural catastrophes with parametric risk transfer and new sources of capital.
“You could roll that out to a lot of places,” said Beaton, if the capital was available at a suitable cost.
Howden mentioned the parametric initiatives the broker is working on in its climate risk and resilience division. When bringing “coverage to areas that haven’t got it”, he said, “the speed of the delivery of the claim is an important factor”.