Parametrics can complement reinsurers’ capital protection platforms
September 27 2024 by Mithun Varkey
Heightened nat cat losses, especially increased secondary perils, a harder market with limited new capacity availability and changing reinsurance structures with programs moving away from aggregate losses has pushed cedents to look for alternative risk transfer solutions – including parametric products.
Index-based products can complement reinsurers’ capital protection platforms and provide quicker access to funds compared to traditional cover, said Jeremy Waite, head of catastrophe advisory group, Asia Pacific, Guy Carpenter.
“Parametric insurance can fill the protection gap left by indemnity insurance from deductibles, excluded perils, scarce capacity and contingent business interruption,” said Waite.
Indeed, it is important to note that parametric insurance is not designed to replace traditional insurance, but to complement it in helping to cover financial losses or uninsurable perils.
The parametric market is growing rapidly, with more entities offering parametric products or partnering with managing general agents (MGAs) or managing general underwriters (MGUs) that offer specialised expertise and capacity.
Awareness of parametric insurance is also increasing in the region due to growing awareness of risk, new market entrants, enhanced availability of data and models, and the advantage of quick fund disbursement in disaster areas.
“Parametric insurance can fill the protection gap left by indemnity insurance from deductibles, excluded perils, scarce capacity and contingent business interruption.” Jeremy Waite, Guy Carpenter
“While there is always some basis risk due to potential differences in triggers and amounts, there are ways to minimise this,” he said.
“For instance, GC StormGrid leverages real-time data from meteorological agencies to develop parametric tropical cyclone covers.
“By employing a grid of cells instead of a single geographic domain, it effectively reduces basis risk and enhances accuracy by calibrating recoveries closely to client exposure distribution. Our internal testing has demonstrated accuracy improvements of approximately 40-50%. Additionally, parametric triggers in catastrophe bonds can be structured to minimise basis risk and complement reinsurers’ retrocessional programs,” he explained.
Parametric insurance, however, faces challenges due to limited credible data and models in certain regions and for some perils, making it difficult to structure deals. It takes time to develop models and data to measure basis risk precisely.
“Despite the added complexity compared to traditional coverage, parametric insurance provides swift payments and access to non-traditional reinsurers’ capacity. While it is ideal for public sector needs, ensuring relevant coverage and effective triggers across regions and perils remains a challenge,” he said.
The reinsurance market experienced a significant reset on January 1, 2023, due to the aftermath of Hurricane Ian in Q3 2022. The reset was driven by record levels of natural catastrophe losses in 2022, resulting in higher retentions and pricing for traditional reinsurance cover.
To manage the increased cost of reinsurance capital, insurers are assessing risks and strategies for specific perils.
“We are seeing the growth of the ILS market in Hong Kong and Singapore as reinsurers seek to diversify their protection needs. Capacity is increasing in response to the rising demand, particularly as the indemnity markets are currently at a peak,” Waite said.
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