Parametric solutions have potential for significant cat-exposed risk transfer: Augment Risk

The core drivers behind the growth of parametric risk transfer and its potential benefits to companies and insurers alike are so compelling that an increasingly significant percentage of risk could be transferred in this way in the coming years. 

At the forefront of that change is Augment Risk, the broker that specialises in strategic reinsurance and risk capital solutions with deep expertise in parametric products “We could see a significant transition of the applicable traditional market to index-based solutions,” Kurt Cripps, who leads its parametric division, told Miami Reinsurance Week Today.

Colleague Paul Ramiz, associate partner, international parametric, acknowledges the size of this ambition. But says it is not unrealistic either. “There is no reason why in, say, 25 years upto 10 per cent  of the applicable cat exposed marketis not done this way. When you look at the advancement in technology, including AI, parametric is the cleanest insurance product there is. 

“If it's designed well, it pays claims very quickly. That is so valuable when it comes to capital efficiency. Yes, it's a nascent market rather than a mature one. But why not have big ambitions? 

Many factors drive this growth, but Cripps picks up on the point about technology. Things such as satellite data, for example, are opening new opportunities for parametric solutions in a way that was never possible before. “Satellite data combined with AI will be the future for the insurance market. It is already revolutionising what is possible using parametric solution.”

Another driver is the  size of the protection gap in so many markets and relating to so many perils, especially in Latin America. Alejandro Solorzano, associate partner, LatAm parametric, Augment Risk, stresses that it is not closing in the region – it is just getting bigger. 

There are many and complex reasons for this, but one is the retraction by many insurers from covering secondary perils. Combined with increased property values driven by inflation, an even greater gap has developed between economic and insured values. “That needs to be addressed with additional protection,” he said.

One other factor is a willingness on the part of investors to back parametric solutions. In the aftermath of a series of cat losses in the period 2017-2020, many cat investors had a nasty shock when deals they had previously considered short term (one-year property cat treaties) turned out to be anything but. Losses took years to calculate, and legal disputes bogged down the whole process.

The term ‘trapped capital’ was coined and has been a persistent issue since. “Investors have started to find it very frustrating,” said Cripps. “Property-cat is actually now long-tail line of business. You can't settle until the last claim is paid. That's a real frustration to an investor. That means they are looking at other options, including parametric, which really is a short-term game. That availability of capital is needed for the market to grow.” 

“It is simple conceptually, yet really complicated when you get into the data, and detail. The devil is in the data and the more you understand the data, the less basis risk there is. So, structuring these products correctly is absolutely critical.”

All this is good news to Augment Risk, partly because there are very few firm’s offering sophisticated and credible parametric solutions and the talent pool in this sphere is small. Ramiz echoes this. “There's very few people around who have done this as long as the senior team  here. We work with up to 40 capital markets investors, we can offer bespoke structures, policy wordings and claims are paid fast. There is a real benefit of working with an independent broker with independent expertise. We're not driven to sell a certain product; everything we do is client first. On that basis, we're trying to transition and revolutionise the market.”

He adds that parametric solutions can also boost capital efficiency – and prevent risks leaving the industry. “If more risk is retained by buyers, the threat that it leaves the industry for a long time. If you keep increasing deductibles, you add more exclusionary clauses, that risk starts to go away.

“As a firm we navigate complex markets to source optimal reinsurance and capital solutions that support business strategy. We help clients achieve their strategic objectives with a unique blend of innovation, client focus, and deep expertise” 

Kurt Cripps is leader of Augment Risk’s parametric division. He can be contacted at: Kurt.Cripps@augmentrisk.com

Alejandro Solorzano is associate partner, LatAm Parametric. He can be contacted at: Alejandro.Solorzano@augmentrisk.com

Paul Ramiz is an associate partner, international parametric, He can be contacted at: Paul.Ramiz@augmentrisk.com

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