Parametric solutions are increasingly attractive for reinsurers

​Parametric solutions are becoming increasingly attractive in the reinsurance space—and having completed its first cyber parametric deal through the AkinovA platform earlier this year, Hiscox is poised to explore further parametric possibilities, Andrew Dolphin, director of underwriting–London, Hiscox Re & ILS, told Intelligent Insurer.

“Parametric feels really relevant at the moment—when you think about complex insurance policies and the appropriateness of wordings, parametric brings simplification to the products,” Dolphin said.

“We think that’s a way for reinsurers to sell business cover to insurers on a parametric basis but also to originate the insurance as well.”

One of Hiscox’s key aims at present is to keep moving forward in the cyber space, with parametric solutions playing a key role.

“We’re a big seller of cyber reinsurance on a non-proportional basis, but with the way cyber reinsurance is constructed at the moment it’s very difficult to see any real diversification in a cyber portfolio,” he said.

“When we think about the reinsurance we are selling, we have to think about aggregating it all in a tail scenario, so any way we can think about diversifying that book would enable us to sell the product more efficiently.

“Parametric is one way we are thinking about that, in terms of selling policies that will only cover a specific peril within cyberspace—for example, selling insurance that would protect from cloud outage only for particular cloud providers.

“It enables you to start to think about diversifying your books, selling pockets of cover and building more capacity into the marketplace, as you don’t have to aggregate every single dollar in a peril scenario.”

​“It enables you to start to think about diversifying your books, selling pockets of cover and building more capacity into the marketplace.” Andrew Dolphin, Hiscox Re & ILSIncreases sorely needed
Results for Hiscox Re & ILS have been distressed over the last few years due to a number of losses, and Dolphin’s view is that current rate increases are sorely needed.

“Losses have proved that there is not enough money in the pot to be able to support them and provide satisfactory returns, but we’ve seen positive rate momentum through 2020 on loss-affected accounts and more recently through July 1 through no-loss-affected accounts.

“Looking towards 2021 we are seeing an opportunity in the market hardening and getting back to a more sustainable level of return,” he said.

“The last few years have shown we need to keep on top of claims trends—there has been an increased frequency in multiple regions of the world and it’s a matter of monitoring that and ensuring we are being paid appropriately for that.

“The big thing for us that should underpin an improving rating environment is the investment outlook—if you look at the company investments landscape at the moment, the opportunity for significant returns just isn’t there.

“If you can’t rely on making decent investment returns then you have to be sure you can make decent underwriting returns, and that should drive pricing up.”

As the market hardens, Hiscox has no intention of resting on its laurels—it remains focused on building performance. One key aspect of this is learning from the past, reviewing claims data from the past few years.

“We’re quite strong in our view of risk; we make our own modifications to all the vendor models where we see them as either being deficient or underperforming,” Dolphin said.

Hiscox is looking closely at what has happened in the soft market in terms of reinsurance structures that have caused issues.

“These are things like aggregate structures, widened terms and conditions—and we are seeing a frequency that maybe hadn’t been expected before, so we are questioning the pricing adequacy,” he said.

Future challenges
Meanwhile, Hiscox’s R&D team is working on anticipating future challenges—for example, by looking at climate analysis.

“We are making sure we are ahead of the curve there in terms of adjusting pricing to allow for the increased risk through climate change,” he said.

The team is also doing a lot of work around cyber, especially in the light of increased ransomware attacks this year.

“We are trying to trend that development forward and make sure we are pricing appropriately in that marketplace as we go into 2021,” said Dolphin.

On the topic of cyber, he sees the biggest opportunity for next year lying in the retro market.

“We are very fortunate that we have been in retro for a number of years,” he said. “As the market has softened over recent years, we’ve taken a lesser position in that market, but now pricing has responded appropriately, it allows us to grow in that space.”

Other plans for 2021 include a sizeable IT restructuring within Hiscox Re & ILS, including modernisation of apps.

“We build a lot of our software in-house or at least design it ourselves, and I think there is an opportunity to modernise that and move it forward, responding to the increased levels of data we receive and looking at our ability to aggregate and interrogate it,” he said.

He added that this links in with a real opportunity to think about digitisation and distribution in the reinsurance space, especially in the light of lockdown and the digital advances accelerated by the switch to remote working.

“We in the reinsurance space are a bit ahead of the curve; people have their own systems, we have been able to benefit from that, but there are things we can do around integration with our own systems—it’s time to push forward.”

He is also keeping a close eye on the changes and opportunities created by mergers and acquisitions activity in the broking space.

“We have the Willis and Aon merger and the Guy Carpenter and JLT Re merger generating pretty big entities, so how we manage those relationships will be important.

“We have seen a large movement of talent out of those entities into some up-and-coming reinsurance brokers—it provides an interesting opportunity to get close to those guys, who think about things a bit differently, and allow us to get closer to the clients.

“Making sure we engage on both sides of that equation is something we are thinking about going forward—and it will be interesting to see how that develops,” he concluded.