Parametrics insurance - has the time come?
It has long been talked about as a solution to many of the insurance problems that worry risk managers, and now it’s time may be about to come.
Parametrics - a specialised form of reinsurance or insurance used mainly in catastrophe bonds - could become more mainstream in the commercial sector and so address some of the limitations of traditional insurance. That is the conclusion of a report from Airmic published in collaboration with Swiss Re Corporate Solutions and Marsh.
Parametric solutions seek to provide clarity and certainty of coverage and speed of claims resolution for risks that might otherwise be clouded by exclusions and complex policy wordings. Underwriters and buyers agree in advance that a claim will be triggered by a pre-agreed occurrence or movement in an index without any need to investigate the precise extent or cause of damage.
Benefits of this type of policy include wider and more tailored coverage and rapid, more predictable, payment when claims are made with fewer hurdles to jump. It can also protect risks that traditional insurance tends to shun such as disruption caused by ash clouds and pandemics.
Risk managers have started to use parametrics in the travel, retail and agricultural sectors, and today's report envisages that it could be applied much more widely. A next step could be to develop parametric products that protect intangible assets and the risk of cyber-damage.
Insurance buyers wishing to go down the parametrics route face a number of challenges and may need to acquire new skills, states the report. The data demands of parametrics are different and, because the cover tends to be wider, it can be more expensive.
White paper: Parametric solutions
This paper, developed with Swiss Re Corporate Solutions, Marsh and a group of risk managers, will look at the challenges faced when purchasing parametric insurance solutions and how these can be overcome.
Buyers should, says the report, have a good understanding of the organisation's business model and risk landscape, and may need to gather support from senior colleagues internally. Getting the Chief Finance Officer on side at an early stage is recommended.
"This is an area of insurance that has the potential to grow rapidly, both in terms of the extent of its application and the number of companies that use it," said Airmic market development manager Georgina Wainwright. "It can provide more options and ultimately ensure that insurance becomes a truly strategic purchase."
"Concerns about large, complex risks directly related to business operations are on the rise - it's about protecting revenues. Parametric solutions can be used as a business tool to provide certainty and speedy access to liquidity when most needed. Risk managers are enablers and we can work together to develop highly bespoke protection." said Christian Wertli, Head Innovative Risk Solutions as Swiss Re Corporate Solutions.
Steve Harry, Risk Finance Consultant, Financial Solutions Group, Marsh, said: "Parametric insurance solutions can help firms reduce uncertainties around cover and cashflow arising from traditional policies and form part of their financial protection. For risk managers, taking the time to understand their firm's ability to withstand future 'shocks' and gaining the support of the board are crucial first steps to incorporating parametric insurance solutions into their overall risk management strategy."
"Parametrics is still work in progress, but I can see it becoming mainstream in the future, because it offers certainty of timing and hassle-free payment," said Airmic past-chair Paul Goulding.
Airmic board member Claire Combes said: "I am excited about the ability to access parametric solutions. I believe they will increase the opportunity for a large organisation such as ourselves to be more dynamic in our risk transfer, in particular the ability to access more coverage in relation to non-damage business interruption."
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