The dearth of cat capacity is driving demand for alternative risk transfer solutions

The growing reticence of insurers and reinsurers to write certain types of cat business is driving demand for alternative risk transfer (ART) solutions, such as technology-driven parametric insurance products, Mario Tucholke (pictured), commercial director for Germany, Austria, and Switzerland (DACH) at Descartes Underwriting, told Intelligent Insurer.

“Continued insurance market hardening across the industrial sectors and regions has put mounting pressure on nat cat deductibles and the availability of competitively priced capacity. We are seeing big opportunities in storm, hail, and flood covers, especially in the German market,” Tucholke said.

“As we’ve seen this summer, drought and river level volatility have become more of an issue. Agricultural and renewable energy yields are also affected, and seeing increasing demand for cover. Meanwhile corporates are being urged to contain their premium spend. That’s an opportunity point for underwriters of parametric products.

“As traditional insurers continue to pull back from more challenging risks, not least in climate-change-related areas, parametric solutions are increasingly popular among risk and insurance managers. The time is now, not only to introduce a kind of ART to the customer, but also to establish a solution that will be state-of-the-art tomorrow.”

Descartes, a managing general agent backed by a panel of tier-one risk carriers, and able to offer $200 million in capacity per policy, offers products covering a full spectrum of natural catastrophe and extreme weather exposures, including named windstorm. Its covers are designed to supplement gaps left by traditional insurance.

In the context of wider market conditions, Tcholk believes that the momentum for parametric risk products will not diminish any time soon.

“We are seeing big opportunities in storm, hail, and flood covers.” Mario Tucholke
, Descartes Underwriting

“It is essential in today’s environment, as demand, risk, and premium rates are increasing massively at the same time that capacity is decreasing, to have new, solvent, and reliable insurance players in the market. From a climate-exposure perspective, the need and demand for risk transfer solutions has become increasingly more pressing,” he said.

“Capacity restrictions introduced by the traditional market for a variety of nat cat perils are not expected to change any time soon, unless they increase. Treaty renewals for 1/1 are expected to introduce even tougher terms for catastrophe exposures, which will drive further demand into the parametric sector.”

This dynamic is a global one, also very pronounced in the US market, in which demand is skyrocketing. Daniel Vetter, head of North America at Descartes Insurance Solutions Agency, says the company is seeing the greatest demand—and therefore the biggest opportunity—in this market for coverage of tornado, hail, and wildfire.

“The traditional market has either fully retreated from underwriting these perils, or will write them only at significantly higher deductibles/retentions and pricing, and while offering far less capacity overall,” he said. “Case in point: many solar projects in Texas, which are prone to hail and tornado, could not continue development without a parametric cover.”

Vetter added that, despite the increased demand, education about parametric coverage is the company’s greatest challenge. It takes time to show brokers and buyers (including risk managers and executive management) the concept of parametric risk products, the type of exposures they address, and how they work in practice, he noted.

“We continue to drive against the central question: why should a risk manager consider a parametric solution, rather than traditional insurance? The answer isn’t complicated.

“Now more than ever they have to challenge the balance between cost efficiency and building up individual risk coverage for their dedicated perils of tomorrow.

“This context, and the reality of climate change, calls for a revolutionary approach to insurance cover. That’s what we focus on in the parametric space,” he concluded.