Parametric: the time is now as the concept enjoys a renaissance

Key takeaways

- MGAs helped drive ‘explosion’ in parametric products in last six years
- Supply chain vulnerability and intangibles boost product demand
- Parametrics to stem the property-cat ‘bloodbath’ and plug nat cat and cyber gaps
- Lack of parametric in a company’s suite of products now viewed as ‘deficiency’

As it’s just 20 years old, it might seem strange that the modern version of parametric insurance is already having something of a renaissance. But renewed interest in the product, which has been around in some form since the 1800s, and its potential has rocketed in the past five or six years driven by evolving risks, managing general agent (MGA) activity and advancing technology.

An Intelligent Insurer panel discussed how parametrics can insure the previously uninsurable as well as tackling the big issue of our age: the rise in climate change-related natural catastrophes. The panellists were Martin Hotz, head of parametric nat cat at Swiss Re Corporate Solutions; Laurent Sabatier, co-founder and executive director of Skyline Partners; Sid Mouncey, chief executive officer of Blink Parametric; and Richard Coyle, head of major accounts and capacity management at FloodFlash.

Explosion in parametrics

As recently as 2015/16, the offering in the parametrics market was “pretty limited”, according to Coyle. At that time it was typically earthquake and windstorm parametric from companies such as Swiss Re and Munich Re and a few others.

“But in 2017/18 there was a huge explosion of MGAs”, Coyle said. This increase in MGAs, which are known for being nimble and driving product innovation, accelerated developments in the parametric space.

“MGA activity allowed new capacity to come into the market because you’ve got a bunch of carriers with the appetite to do parametric, but they’d rather delegate capacity to the specialists than do it all in-house themselves,” he explained.

“That was really positive in that it led to an explosion in the range of parametric products available. Now we have a much more dynamic market, more players in the market and more competition. And, for the end customer, prices have come down as well. There’s been a massive amount of change in the last five or six years.”

Sabatier added: “The trend for growth we see is broad, with parametrics being used more and requests increasing from a wide range of actors in the industry.

“It’s been kept in the background, in the back pocket, for probably too long.”

Intangibles up the ante

Climate change is increasing the risk of droughts, floods and secondary perils and it’s something the insurance industry is very aware of. Hotz said the need to protect against this evolving threat is essential for businesses.

“Parametrics have a role to play in covering intangible risks associated with this,” he said.

For example, he warned, weather and nat cat risk represent an additional pressure on already stressed supply chains. During the COVID-19 pandemic the vulnerability of interconnected global supply chains was noted keenly.

“Supply chain risk is one of the many situations where traditional insurance struggles,” Hotz said. “Traditional insurance works pretty well for tangible assets. But more companies also have substantial intangible exposure in supply chains or contingent business interruption, and in our experience that’s been one of the drivers for the increased uptake of parametric insurance in general.”

As more and better data has become available with greater tech support on the platform side, Hotz said the insurance industry could “make parametric insurance big and make it work for policyholders”.

Stemming the property-cat ‘bloodbath’

The developing world is well-versed in the use of parametric solutions but this type of insurance has a lot to offer the developed world too, Coyle said.

“Just look at what’s happening in the US property-cat market at the moment: 2023 is proving to be a bit of a bloodbath. Parametric is there to bring very efficient capacity to that market to plug gaps in programmes where traditional insurers are retreating—nowhere more so than the so-called secondary perils such as flood, hail and wildfire.”

“Parametrics are now emerging as a relevant and efficient tool to complete existing placement options and provide solutions to plug gaps in cover such as excess, deductibles, exclusions, and limits,” said Sabatier.

It could even cover risks which are traditionally not covered at all such as subtraction, disruption, non-physical damage—intangibles—which can be very difficult to quantify, he added.

“It’s perceived that this complements traditional cover to bring liquidity fast and guaranteed access to cash to respond to emergencies, to complete rather than cut products. It provides the first layer to pay quickly to provide solutions for risks that may be at the boundaries of insurability.”

Post-COVID-19 world opportunities

When the world reopened after global COVID-19 lockdowns, it took a while for certain sectors to get up to speed. Travel was particularly affected, as the aviation industry struggled with huge demand. Flights were cancelled and baggage was lost, creating a multitude of claims from stressed customers.

Mouncey said that in the digitally savvy, post-COVID-19 travel world, people’s perceptions of the need for help and support when travelling has changed. They want immediate resolution of their claims.

As a result, he said, many insurers are dealing with significant volumes of high volume, low ticket claims coming through their contact centres.
“We’re able to simplify that journey so that customers get the resolution—a payment—offered by phone when they’re in the airport or when that disaster happens and it avoids the whole claim process,” he explained.

“Customers get support and help, but the insurers are also able to avoid the kind of complex, time-consuming process of handling multiple calls with customers when they’re in a stressful situation.”

More claims are being paid, he said, but the real benefit to insurers is that these claims are being dealt with so they can focus on the bigger ticket insurance claims. Consumer demand and the post-COVID travel world lends itself to immediate resolution using parametrics, he said.

Stabilising distressed cyber

“Cyber is one of the most distressed lines across the world market,” said Sabatier. “It’s distressed for every customer from large corporates down to personal lines and small and medium-sized enterprises (SMEs).”

He said the market won’t develop on the SME and personal lines side until the large corporates market is stable and mature. For Sabatier, the obvious solution to this is parametric. He acknowledged the use of captives and retention as other solutions but said parametric is “a perfect complement to this” as an extra capital instrument and liquidity tool.

“When thinking about this line, I view cyber parametric with a consumer lens,” said Mouncey.

“It’s gaining something for consumers who are at significant risks related to cyber threat, cyber risks, their own behaviour, and identifying interesting parallels that can be tracked and monitored. It can then trigger beneficial resolutions and help for consumers. It’s going to be a very interesting area in the coming year or two.”

Exclude it at your peril

As new technologies have extended what parametric insurance can offer and this has gained wider recognition, the product has become “more mainstream”, according to Sabatier.

“Now it’s almost a way to differentiate your suite of services if you’re a broker. And if you don’t have parametric it’s perceived as a deficiency,” he said.

He thinks the product will continue to become even more mainstream and still has plenty of untapped potential for commoditised products, but that there is still more work to do to make it more widely available and better understood.

To find out what our panel thinks the future might hold for parametric read our companion article here:  Seven future trends for parametrics