Parametrics gains ground in hard market as claims records grow

Parametric insurance is gaining some traction as traditional insurance prices continue to harden and companies operating in the sector build up a claims payment history, industry observers say.

The coverage, though, which is based on an index or threshold rather than being triggered by a specific loss, remains a specialist area that is used to address a specific risk or a shortfall in traditional insurance programs, some say.

Areas covered by the products have also expanded, for example, with the recent launch of parametric insurance coverages designed for cyber exposures. 

Parametric coverage comes in various formats, but one often-cited example is coverage for a ski resort buying protections against a lack of snowfall. Should a specific minimum snowfall – such as 12 inches in a specified period – not be reached, a payout could be triggered, regardless of whether the ski resort lost money. Parametrics are often tied to a single, measurable threshold or index, and payments can be made comparatively quickly, often within 30 days of a loss, experts say. 

Megan Linkin, New York-based senior parametric nat cat structurer for Swiss Re Corporate Solutions, said claims in North America have frequently been settled within 14 days. Among Swiss Re’s offerings are parametric hail coverage available in the U.S. since 2020, and its online Pop Storm platform, where hurricane limits up to $5 million can be bound online in a parametric policy. Other products address hurricane and earthquake risks, she said. 

Demonstrating claims payments is a key component in building trust in the product, Ms. Linkin said. 

“An additional piece of education that has helped make the case with clients is the claims. That claims history has definitely helped,” Ms. Linkin said, in terms of building client confidence and demonstrating the products will respond and perform as described. 

She added that Swiss Re has had claims under its hail coverage for all three years it has been in effect and payouts have occurred with other products for hurricanes and earthquakes in both North America and Asia Pacific. 

Parametrics, though, appear more limited in scope than traditional insurance when covering a specific risk, and thus more expensive, said Susan Hiteshew, vice president of risk management for AvalonBay Communities Inc., an Arlington, Virginia-based real estate investment trust.

“You are very proscriptive in what you’re covering and that’s generally a narrower scope than what a traditional insurance policy would cover, so on a relative basis it appears more expensive,” Ms. Hiteshew said, adding she has reviewed such coverage for more than one company but has yet to utilize it.

The coverage can be a useful tool for risk professionals addressing a specific risk or shortfall in an overall program, she said.

Parametric coverage can also provide an additional avenue to capacity amid a firm property market where traditional capacity is constricted, said Cole Mayer, senior structurer, North America, in San Francisco for Swiss Re Corporate Solutions. 

“Market disruption is forcing folks to really think about how they transfer natural catastrophe risk,” Mr. Mayer said. Some policyholders are adding parametric coverage to their risk management “toolbox” and using it to cover deductibles and exclusions or gaps left by traditional coverages, he said. 

“We’ve seen a substantial increase in interest from clients in parametric and index solutions. The hard market environment and more volatile loss frequency and severity have resulted in increased retentions, tightening of terms and conditions, and coverage exclusions,” said Antoine Bavandi, London-based global head of the public, parametric and climate resilience solutions practice for Gallagher Re, the reinsurance business of Arthur J. Gallagher & Co. 

While parametrics are “traditionally mostly used for public sector transactions and agriculture insurance, parametric solutions are now increasingly being considered as a complementary component in commercial insurance programs,” he said. 

Parametrics are also being deployed beyond mainstream property/casualty exposures. 

For example, New York-based Parametrix Insurance Services Inc. monitors cloud providers for outages as part of its triggering mechanism for cloud downtime coverage. 

In addition, Intangic MGA Ltd., a London-based cyber managing general agent, launched recently with backing from Axa XL, a unit of Axa SA. Intangic offers U.K.-based companies up to $15 million in coverage for losses from material cyber breaches, using the measured level of malicious activity targeting a company and the subsequent loss in value as triggers. The company plans to extend the offering to the U.S. market.