Parametric view

Parametric insurance is predicted to generate nearly

US$30bn per year by 2031. Ned Holmes looks at
the impact it may have on the captive insurance
industry, and why huge growth is expected
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35

Parametric insurance has become an established part of the

captive lexicon in recent years – a regular talking point at captive
conferences and, increasingly, in board rooms.

While traditional insurance functions by indemnifying the actual

losses sustained by a policyholder during an event, parametric
insurance is linked to predetermined index-based triggers that
lead to pre-agreed payouts.

If the index threshold is reached (a certain wind speed for

hurricane cover or a length of downtime in cyber cover, for
example) then the policyholder receives the payout – whether or
not the actual losses are sustained.

A hot topic

The captive industry may have been late adopters, indeed the
structures have been utilised elsewhere since the 1990s, but there
is now a growing acceptance of the three-fold advantages these
solutions can offer.

This includes certainty, (as the pay out triggers are predetermined
and index based), speed, (as it removes the need for a lengthy
loss adjustment process), and cost efficiency, (as there is no
requirement to employ technical specialists like claims managers
and attorneys to assess actual losses).

Marcus Schmalbach, CEO of RYSKEX, believes that parametric

solutions are “a great thing for a captive manager to have in their
toolkit” and predicts we will see them used much more frequently
in the industry in the next decade.

“Parametrics is not adopted by everyone, but I see that the big

brokers are working hard on adopting these solutions.

The new thing always becomes popular as soon as the clients

need it, and we have the clients’ need because the markets have
a lack of capacity. We needed to change our strategy and our
indemnity coverages into parametrics.
images by kevin_carden/stock.adobe.com

“In five years time, we won’t be talking about it as something new,

but as an established solution.”

“This is an area that is growing,” notes Jan Bachmann, head of

innovative risk solutions EMEA, director at Swiss Re Corporate
Solutions. “In a couple of years, buying parametric for a captive
will be a normal business, but there is still a way to go.”

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“Parametrics are for example, we need a lot of capacity but they do not understand
or do not like indemnity, so parametrics are also an opportunity to
an opportunity to find capacity in the capital market.

find capacity in the “There’s momentum. It’s a new way of underwriting lines to help
capital market” address systemic risks, such as hurricanes and floods. A lot
of insurtechs are coming into the market that don’t offer any
Marcus Schmalbach, RYSKEX indemnity solutions and are just focusing on parametrics as a
way to help out companies with climate change or pandemic
risk. It’s the new boys in town that offer it. There is need and
then you create a market. This is happening right now because
Parametric boom of the hard market.”

It’s not just in the captive market where a parametric boom is Nils Ossenbrink, managing partner, head of distribution and
expected. Swiss Re has predicted that the parametric insurance products at Twelve Capital, offers a capital market perspective.
industry could generate nearly US$30 billion p/a by 2031 – up He says parametric insurance could be a way of consolidating the
from $11.7 billion in 2021. As Swiss Re’s Bachmann says: “The mismatch of investors’ demands and the demand for reinsurance
numbers are expected to be significant. Why? Because it’s capital as it offers more clarity in terms of expected pay-outs. After
more than just what has been covered in the past by traditional an event, the size of the loss is known which can be beneficial
insurance. You can insure more on a parametric basis due to the from a structure perspective.
flexibility of the covers.
Ossenbrink notes that the industry is currently confronted with
“It all started with natural catastrophes 30 years ago, when Swiss very high rates. The insurance industry is calling it a ‘hard market’
Re sold the first parametric covers for earthquakes and wind offering interesting opportunities to investors. Elevated rates
perils. Initially, it was only about natural perils but this principle of are an indication of a lack of capital, which is also a result of the
systemically looking for parameters on which the client depends, growing number of medium-sized, partly climate change-induced
can also be applied to non-natural catastrophe risks.” natural catastrophe disasters.

He adds: “It’s a useful tool for non-physical risks. As an example, a “We have clearly seen what climate change means costwise in
terror attack may cause loss of attraction in certain areas – people recent years, and even this is going to increase,” he explains.
stop going there because it has become dangerous. There is no “Institutional insurance-linked securities (ILS) investors had
physical loss per se, but it could impact the revenue stream of the to face issues, for example: trapped collateral, side pockets,
client because people will stop coming. intransparency — all clearly below return expectations.

“There are plenty of ways to track it – such as airport data, lack “These underlying issues cannot be solved by parametric solutions,
of footfall or attraction, mobile data, credit card usage – and a but if the risks are structured in the proper manner, parametric
difference from the average could expose the client to a loss- solutions can support closing the global protection gap.”
making situation.”
Ossenbrink also believes that the growth in the catastrophe bond
market hints that the predictions for the parametric industry may
The hard market be on the money. He says: “The cat bond market has grown to
around $38 billion, up from $5/6 billion in 2002, and from $11/12
A key factor in the predicted growth of parametrics is the current billion between 2008 and 2012 — so it more than tripled in the
market condition. last 10 years.

“It’s because it’s a hard market that we need to get capacity and “From our point of view, it would be realistic to project that the
parametric is the only way the capital market understands to parametric industry could grow to $30 billion if the relevant
assist,” adds RYSKEX’s Schmalbach. “With insurance-linked funds, structures are available.”

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New solutions for new risks risk landscape, parametric can facilitate the response to a loss
situation and speed up the claim payment.
Natural catastrophe-related perils are the number one risk
covered by parametric insurance and will continue to be so for He adds: “There are some good examples where parametric is
some time. However, there is a growing confidence that the still in its early stages, such as cyber or liability risks, but there is
structures can be used elsewhere as well. In some places that is also some promising potential in these fields.”
already the case.

“There are interesting solutions by start-ups and incumbents from Industry 4.0 and AI
the reinsurance and traditional insurance space where they use
parametric for cyber and pandemic coverage,” says RYSKEX’s Looking ahead to the future of captive insurance, artificial
Schmalbach on the topic of emerging coverages. intelligence (AI) and the digitisation of the industry are two topics
that are impossible to ignore.
“Wherever you need new solutions when new underwriting comes
in, or new perils come to the market, you see a lot of companies “AI is going to affect many industries including the insurance
that want to seek new ways and adapt new solutions for those industry,” says Twelve Capital’s Ossenbrink.
new perils.
“The way of modelling risks will change in the coming years,
“Intangible assets is a currently underdeveloped market where whereas speed will increase. The value chain, if you take
I see parametric as a good fit. It’s a very important part of a parametric solutions as an example, can be more easily digitised
company’s balance sheet. There aren’t too many coverage lines than an indemnity structure. New business models, RYSKEX for
that already exist, but I think it could fit perfectly with parametric example, might boost the industry by disrupting or breaking up
as it could be linked to stock price. the traditional industry. The predicted growth of the parametric
market to $30billion by 2031 is not necessarily based on replacing
“It’s something interesting for captives to consider: to get new lines other structures.
of underwriting within the captive. It’s an important market for the
reinsurers themselves as well.” “It will likely replace existing structures while also allowing new
models to provide insurance protection — where you have a
Twelve Capital’s Ossenbrink highlights business interruption, straight-through process from the insured to the capital market.”
cyber or casualty as other ILS areas of interest beyond natural
catastrophe. RYSKEX’s Schmalbach says the growth in parametrics will
be boosted by the digitisation of the captive industry and the
“We will likely see developments in business interruption. We may introduction of AI.
also see cyber risk connected with business interruption as well
as an increasing demand from insurance companies to transfer “ChatGPT has meant there is now lots of attention on how AI
casualty risks to financial markets,” he suggests. works,” he says.

“However, the capital market is still not fully comfortable with cyber “If we’re talking about the digitalisation of the captive industry, I
risks yet. This means that in terms of perils covered by parametric, would say parametric is a wonderful fit.
the focus is still likely to be natural catastrophe-related issues,
which are generally well-modelled and known.” “With AI, you can make wonderful predictions on potential risks
and claim events, as we know, parametric is based on triggers.
Swiss Re’s Bachmann also emphasises the opportunity for other
parametric solutions but warns that many of the new risks that the He concludes: “The more the captive and insurance industry
policies might cover in the future are not known yet. develops the willingness to digitise and optimise their process to
make ‘industry 4.0’ happen, the more parametric solutions will be
“They’re usually the black swans – we may not know them today, used. Parametric will grow even further when we start to digitise
but they might have a big impact tomorrow. In an emerging our industry.” ■

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