Parametric newsletter

Parametric insurance today is a tale of two cities.

The concept of insurance that pays out based on an event or index rather than an assessment of loss can apply to all sorts of coverage. But there is a fast-growing, successful parametric insurance market and a nascent, uncertain parametric insurance market.

The former consists of corporations, insurers and the public sector buying protection against natural catastrophes and extreme weather events. It is not without its difficulties – parametric is not well understood and quote conversion rates are much lower than for other products – but a substantial amount of premium is now being transacted and new market participants are piling in.

The latter is everything else. There are endless ideas for parametric insurance products that would protect individuals at scale, cover other lines of business or address emerging risks. A few have been successful, some have failed and many have never left the drawing board. The challenge is addressing a real protection gap with an insurance product that someone is willing to pay for.

Amid growing interest in the opportunities provided by parametric covers and other forms of alternative risk transfer, this is the first of a series of fortnightly newsletters from The Insurer analysing the latest news and developments in the space.

North America remains focus of nat cat transaction activity

Some of the largest parametric deals are in the catastrophe bond market, where Scor recently secured $175mn of protection against named storms in the US and earthquakes in the US and Canada for three years. The government of Puerto Rico is set to issue its own $75mn three-year parametric cat bond for hurricane and earthquake risks too.

The city of Imperial Beach has become the latest public sector entity to consider parametric risk transfer. It has received an $848k grant from the California Ocean Protection Council to address the risk of coastal flooding, supported by the state’s Department of Insurance.

Protection against volatile weather

While Imperial Beach, surrounded by water on three sides, is most concerned about rising sea levels, changing weather patterns around the world are affecting communities in different ways.

For smallholder dairy farmers in South Asia, heat waves are a growing concern because cows with heat stress produce less milk. A parametric heat insurance product that covers 100,000 livestock in India has now launched in Bangladesh.

Adverse weather can also disrupt the plans of holidaymakers. Revo Insurance has become the latest company to offer travel weather insurance, compensating Italian travellers if rainfall on their trip exceeds a certain threshold.

Meanwhile, US carriers are seeing increased attritional losses from stormy weather, which are mostly retained rather than transferred to reinsurers. Alongside corrective actions on their portfolios, our Analysis finds that some are turning to non-traditional forms of risk transfer, including new parametric reinsurance products.

The Insurer reveals that Branch Insurance is one of these early adopters of parametric reinsurance for severe convective storm risks. It purchased the coverage at 1 January 2024 in a transaction brokered by Gallagher Re, structured by The Demex Group and backed by Descartes Underwriting.

Cyber risks and new products

Descartes has also expanded its cyber shutdown protection for SMEs from France, where it launched in February, to Germany. Cyber is a new area for parametric, with a few products launched, but no parametric cyber market at scale yet.

Lobby group the British Chambers of Commerce has backed calls for a state-backed cyber reinsurance pool. The UK insurance industry’s consultation on a “Cyber Re” scheme is recommending the use of parametric triggers to cover systemic events.

Our Analysis explores the parametric products recently launched for cyber and D&O risks. Does parametric risk transfer have a role in unlocking new capacity and filling coverage gaps in these markets?

Partnerships, people moves and MGA closure

Start-up reinsurance broker Augment Risk has announced a partnership with analytics firm Skyline Partners on structuring and pricing. Last October, Augment hired industry veteran Kurt Cripps to lead its new parametric team.

Another broker building out its parametric capabilities is Lockton, which has appointed Descartes Underwriting’s Paul Jones as its first head of parametric solutions for the UK and Europe.

Jones has been replaced as Descartes Underwriting’s commercial director for the UK and Ireland by Matthew James. James spent 10 years as an alternative risk transfer broker at WTW before a stint as head of business development at recently shuttered business interruption start-up OTT Risk.

OTT Risk’s closure is a reminder that not all parametric solutions will succeed. James’ experience across both parametric cities – the well-established parametric weather market and a start-up experimenting with new products – should equip him well to grow the parametric market at one of its largest MGAs.

Parametric covers, historically a niche, are moving into the mainstream. The Insurer’s free-to-view Parametric Newsletter analyses the latest news and developments in parametric and alternative risk transfer every two weeks. Press 'subscribe' to stay informed on all the ways communities, businesses and insurance companies are using innovative forms of coverage for climate, catastrophe and emerging risks that are otherwise difficult to insure.

Powered by The Insurer, your go to for news, insight and intelligence on the global P&C and specialty (re)insurance industry.

For more content like this, visit theinsurer.com