Parametric Insurance in 2022: what do industry experts think?

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Insight

The parametric insurance landscape has changed substantially since InsTech published its last report on the topic, “Parametric Insurance: 2021 outlook and the companies to watch”. Some applications of parametric have scaled up, while take-up has been slow for some other parametric products. Various new applications have emerged.

Ahead of the publication of our next report, “Parametric Insurance in 2022: the 150+ companies to watch”, we asked four industry experts to share perspectives on the parametric insurance market today. They told us how they see the parametric insurance market changing and what is next for parametric coverage.

Employees of InsTech corporate members will be able to download the report for free from 14 June 2022 by logging into the InsTech website. You can check if your company is a member and create your account by using our Corporate Members application form

Everyone else can apply now for a free pre-release discount code saving you 50% off the published price. 

Rachel Hillier, Partner, Capital Law

How has the parametric insurance landscape changed since 2020?

Covid-19 and climate change have created a lot more interest in parametric insurance in the last 2 years. Notably, businesses, and those who have been affected by natural disasters, are looking for alternative protection they can afford.

Covid-19 has heightened business’ sensitivity to uncertainty and potential threats to operations. Traditional business interruption policies have not provided the protection that many expected, with many disputes still going through the courts. Meanwhile, flooding events in the UK and natural disasters elsewhere have left many businesses unable to obtain insurance protection at all, and if it is available, at a price they can afford.

Insurtechs and SaaS providers are now honing in on those gaps in the traditional insurance market, that have been laid bare in the light of these events. As well as direct sale providers (e.g., Global Parametrics, Floodflash, Descartes, Kita), we are also noticing more platforms, back-office solutions and products being sold or licensed to mainstream insurers for parametric solutions (e.g. Blink, Previsico, Fathom, Skyline). 

Munich Re recently released “One Cat”, a parametric solution for larger corporations and financial institutions covering cyclones and earthquakes. A newly launched platform, OTT Risk, uses advanced technology such as machine learning to price and trade business interruption cover. More established MGAs such as New Paradigm Underwriters, CelsiusPro and Arbol are raising equity to fund their own parametric insurance offerings.

How do you expect the market to change in the next three years?

It is likely we will see parametric insurance in new areas such as cyber, mitigation expenses and event cancellations.

Expect to see traditional all risks policies tightening exclusions of liability in relation to pandemic or Covid-19 losses, natural disasters and cyber risk. Expect to see pandemic insurance providing further products to bridge this gap. I expect that businesses will more commonly hold a mix of indemnity and parametric insurance policies.

Those who can use technology to make such a mix of cover easily available and flexible, either in one policy or a dashboard solution of a mix of policies, will be ahead of the market. Blockchain may provide a trusted immutable platform for further parametric insurance innovation.

Continued technological advancements (using AI, physical sensors, collation of multiple sources of data, automation and embedded insurance) will enable parametric insurance to diversify into new areas.

Martin Hotz, Head Parametric Nat Cat, Swiss Re Corporate Solutions

How has the parametric insurance landscape changed since 2020?

Over the past few years parametric insurance has proven to work in various successfully handled claims situations. When structured well, parametric insurance really does exactly what it says on the tin. This provides interested buyers with a greater comfort level that parametric insurance is a proven and tested product, which has been refined over the years.

Part of this refinement comes from a richer parametric ecosystem consisting of protection sellers (re/insurance companies), insurtechs specializing in data collection and reporting, and intermediaries. The latter group is of great relevance in commercial insurance as parametric insurance – being new to most buyers – requires a greater amount of education, and a growing number of broker partners have started to specialize in parametric insurance which benefits the education piece.

The overall greater selection is one factor resulting in parametric insurance being more widely accepted and, ultimately, adopted by protection buyers.

How do you expect the market to change in the next three years?

Parametric insurance will gradually leave the niche in which it partially still sits, and become a more commonly used tool in the risk management toolbox, providing a fast, transparent and flexible way to transfer losses (be it nat cat or other perils / non-property lines).

Large corporations, in particular those that are highly leveraged and / or are in a business which is traditionally difficult to underwrite, will increasingly transfer part of their nat cat risks via parametric policies to a panel of re/insurance companies.

These corporations will act as role models to small and medium-sized enterprises – as in a changing climate, nat cat risks are agnostic to company size – leading to a greater parametric insurance penetration overall.

Diego Monsalve, LAC HEAD Risk Consulting, Analytics, Catastrophe Modeling and Parametric Solutions, Lockton

How has the parametric insurance landscape changed since 2020?

The catalyst year for parametric insurance was 2017. At that time, there were just a few parametric policies in place. Hurricanes Irma, Maria and Harvey, earthquakes in Mexico and flooding in Peru changed the landscape. There were success stories of parametric policies paying out within 15 days. As a result, many more companies started using parametric insurance.

Meanwhile, some property damage and business interruption claims from indemnity-based insurance policies at that time are still in litigation. Since 2017 other catastrophe events have increased the uptake of parametric insurance, particularly in the US, Latin America and Asia.

In 2017 just a handful of insurers were offering parametric coverage. Right now there are around ten insurers and MGAs underwriting corporate parametric insurance for natural catastrophes.

A recent trend is that insurers without in-house expertise on parametric are beginning to give capacity as followers. When one of the established parametric insurers is participating, other insurers are contributing capacity; they want to learn more about parametric coverage.

I foresee more players entering the market. This will make the market more competitive and improve outcomes for clients.

How do you expect the market to change in the next three years?

There is a saying that if the parametric insurance market can measure something, it can offer a parametric product for it. The main perils today are natural catastrophes and extreme weather events such as earthquake, hurricane, excess rain, lack of rain and wildfire.

As the parametric market starts to mature in the next few years, we will see more available parametric products, covering cyber, temperature and other risks. Parametric volcanic eruption coverage is another product that I expect to emerge.

Parametric insurance is not for every client, but there are some businesses that require fast claims payments because of the nature of their business, and they will increasingly use parametric covers as a complement to indemnity-based insurance.

Ruth Polyblank, Vice President Insurance, Mastercard

How has the parametric insurance landscape changed since 2020?

Prior to 2020, when the term parametric insurance was used, it was often met with scepticism or perceived as a novelty. Conservative insurance folk would highlight the shortcomings of parametrics comparative to traditional total loss coverages.

The profile of recent climate events and COVID has highlighted the need for more tools and resources to mitigate risks. The litigation around non damage BI in the UK courts and the coverage of numerous pay-outs of parametric programmes for natural catastrophes has also helped to elevate the status and demonstrate the critical role parametric insurance has to play.

How do you expect the market to change in the next three years?

I expect the market to grow significantly in the next 3 years as the penny drops that parametric insurance is about protecting immediate economic wellbeing and not about protecting the totality of your assets. Specifically, I expect to see:

  • Greater adoption of parametrics as part of disaster recovery and aid initiatives.
  • Embedded payment solutions which deliver money where and when it can be most impactful. 
  • An increase in use cases across all weather events, renewable energy, consumer lines products and smoothing / hedging of costs for corporations.
  • Parametric insurance used to build resilience in agricultural communities and to encourage sustainable practices.
  • New parametric SME coverages which can address cashflow and non-damage business interruption.
  • Acquisitions of parametric insurtechs by the incumbents

I also expect that much of this will be achieved through multi-party partnerships which bring expertise across insurance, technology, distribution, and payments together to create impactful and scalable solutions in market.

 

Parametric insurance: learning from experience

Our experts highlight proven examples of parametric paying out after a loss and the shortcomings of indemnity-based insurance for some areas of coverage as key drivers of innovation and growth in parametric insurance. A few applications of parametric insurance have now been proven at scale, while parametric approaches are now being tried across an increasing range of insurance products.

Whilst parametric insurance continues to face challenges, those products that see the most success will benefit from a ‘snowball effect’; case studies of policies paying out as intended will build trust in parametric coverage.

“Parametric Insurance in 2022: the 150+ companies to watch” is InsTech’s overview of the parametric insurance market today. The report sets out the opportunities and challenges associated with different types of parametric coverage and provides a directory of companies offering parametric solutions.

Employees of InsTech corporate members will be able to download the report for free from 14 June 2022 by logging into the InsTech website. You can create your account and check if your company is a member here.

Everyone else can apply now for a free pre-release discount code saving you 50% off the published price.