Beyond niche Nat Cat and seismic risk: new trends on the horizon for parametric products
With renewal season coming to an end every quarter, many companies still face insufficient capacity or placement shortfalls. Thankfully, the evolution of parametric insurance products in the corporate P&C market offers hope. As quarterly and mid-year renewal seasons pass, more brokers and clients are choosing parametric insurance to fill gaps in traditional market capacity and increase their resilience to Nat Cat and climate risks. Read on to learn why:
As the intensity of natural catastrophic losses increases, so does the pressure on pricing and available capacities for corporate insurance programs. Meanwhile corporates are urged to contain their premium spend following continued turbulence of COVID-19 and challenging market conditions
A widening Nat Cat protection gap in developing and more established markets alike, points to the need for innovative risk transfer solutions, including parametric insurance products. This also reinforces the role of brokers in thorough program engineering as more and more corporates look to parametric products to fill the gap left in traditional market capacity and increase resilience to evolving extreme weather exposures.
Peak natural catastrophe perils, such as earthquakes in California and Japan, or hail for outdoor car dealerships, often drive the share reduction decisions of traditional insurers and jeopardize placements. More and more so, parametric insurance products are being used to replace existing covers for specific Nat Cat risk(s) in a traditional program.
For instance, earthquake damage or business interruption are increasingly excluded from policyholder’s traditional indemnity program. Instead corporate clients choose to place their earthquake exposure with a parametric cover. This can enable an increase in traditional player’s risk appetite & share, thus facilitating placement. It also allows for preservation of clients’ Nat Cat limits, keeping corporates covered in a changing climate & market environment
A common way traditional insurance markets alleviate natural catastrophe impact is to dramatically increase self-insured retention. It is not uncommon to see corporates have to bear $10 or $20 million in self-insured retention for major Nat Cat events. This is also viewed as an efficient way to clear loss histories for clients who have suffered from natural events in the past.
Parametric insurance products are a robust solution to compensate insureds for costs left uncovered in their traditional program due these increased deductibles or self-insured retentions. This approach allows brokers to preserve their client’s Nat Cat protection on lower layers even in hard market conditions where deductible shares are increasing. Policyholders also maintain the economic balance of the PD&BI program by presenting a high attachment point for Nat Cat where loss histories are significantly improved.
As traditional insurers continue to increase pricing, increase deductibles, and restrict terms and conditions, clients are turning to the parametric market for solutions. Parametric insurance cover can be used to more efficiently and effectively take on first dollar catastrophic risk which allows the client to seek relief from the traditional program by relying on these legacy carriers exclusively for the excess layers.
|Parametric insurance solutions are deployed to address a number of Nat Cat placement challenges as they are uniquely primed to cover natural risk exposures for complex assets, such as:|
The rise in exclusionary language used in traditional policy wordings as a result of the Pandemic and market hardening have brought unease and frayed trust among Insureds. Comparatively, parametric insurance policies and their straightforward structure provide unveiled transparency that rebuilds confidence for clients in ‘what they see is what they get’. This is core to the value proposition of parametric insurance – the ability to increase the certainty between a loss event taking place and a pay-out being made, quickly, accurately and without friction costs.
The traditional principle of insuring a factory catching fire and its subsequent loss of output as business interruption until the factory is repaired, is no longer fit for purpose. The evolving operating models of businesses place increased importance on their intangible values – such as consumer attraction or revenue – which now account for a greater proportion of overall value than ever before. Parametric insurance is more effective at covering these exposures as there is no property damage trigger for business interruption claims, including in cases of indirect losses of revenue, contingent business interruption and additional costs of working.
A decade ago in Japan, retail groups saw their revenue severely impacted following the Tōhoku earthquake and tsunami. Yet in the absence of direct material damage to the storefronts only a minor fraction of this loss was covered by traditional insurance. Likewise, the exceptional market demand currently being experienced by the semiconductor industry illustrates the need for a new approach to business interruption. Whereas traditional policies pay based on the average revenue of a company, in a year with supply shortages the actual loss could be considerably higher. The flexibility of a parametric insurance cover enables the client to recover their true exposure, customized to market conditions and their individual needs.
Unlike traditional covers where business interruption elements in particular can take an average of 18 months or more to be settled, parametric insurance claims are paid in the same accounting year as the loss, often even just days following the event. This swift liquidity reduces volatility of the Insured’s balance sheet, with loss and receivables both occurring in the same accounting period. Receiving revenue as if operations had continued as normal also supports the business in retaining staff and paying operational and supply chain costs seamlessly.
Ultimately, cost is usually a – if not ‘the’ – key factor in decision making. By making better use of technology parametric insurance can cut administrative costs and make products more affordable. Allowing infinite customization, parametric structures can be made to match a wide array of budgets and exposure means. This is important regardless, but even more so in the current environment where many insureds have (and continue) to suffer financially from the Pandemic. All of which is compounded by the market hardening in the last couple of years.
Throughout global markets we see capacity continuing to diminish for some assets and risks carriers consider tricky to insure or uninsurable due to their frequency or characteristics. This is especially true for natural hazards and extreme weather exposures like wind, solar and rainfall yield volatility. It’s also the case for assets such as underground networks, offshore and coastal properties, overhead transmission and distribution lines, transportation networks, and others.
Loss stricken accounts are much harder to place in the traditional market due to the methodology used by traditional insurers to price the risk, which is heavily weighted on historical losses. Whereas the parametric approach models the underlying risk (e.g. earthquake or flood) of an insured site and provides flexible calibration to historical loss data, risk appetite and any mitigation measures put in place by the client. The use of advanced technology combined with this forward-looking approach means that parametric insurance can extend to new industries that are rapidly developing in remote areas of the region without historical loss records, such as solar plants or offshore-wind farms.
With a growing and extensive product offering against all Nat Cat perils, parametric insurance provides a means to supersede gaps in the traditional marketplace and better protect businesses, public entities, and communities against climate change.
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