Time for buyers to test parametric covers, says Airmic

Risk managers could make better use of parametric insurance solutions to address limitations in traditional insurance, according to a paper from Airmic. Experts say risk managers could introduce parametric triggers into existing policies if they do not wish to purchase full-blown parametric cover. Parametric solutions – where insurance payouts are typically linked to an index like rainfall volume or earthquake magnitude – are already being used by the travel, retail and agricultural sectors, while an airline recently secured a large deal, according to Airmic. Parametric insurance products are a work in progress, but could eventually become mainstream, believes Airmic chair Paul Goulding. In particular, parametric solutions offer risk managers certainty of timing and hassle-free payment, he said. According to Airmic’s paper, written with Marsh and Swiss Re Corporate Solutions, parametric solutions could be applied to a wider range of risks and sectors. They could also be used to develop solutions for intangible assets and cyber damage. Julia Graham, deputy chief executive of Airmic, sees potential in parametric solutions that have matured as a concept and are now being taken more seriously. The product offers fast payments, but they can be complex and difficult for risk managers to understand, she said. Cover can be wider and more tailored than traditional insurance, while payouts are faster and coverage more predictable, according to the report. However, these benefits come at a price – parametric solutions are usually more expensive and require reliable independent data that is correlated to the risk. Parametric solutions benefit from a formulaic process and quick payout, but typically require an index closely related to the risk or a pre-agreed occurrence, explained Christian Wertli, head of innovative risk solutions at Swiss Re Corporate Solutions. This is relatively easy for natural catastrophe risks like windstorm or temperature, but currently difficult for intangible threats and cyber. However, there has been growing interest in parametric solutions for non-damage business interruption, with a lot of enquires in Europe, said Mr Wertli. “Risk managers historically have looked to protect assets and liabilities, but nowadays businesses are concerned with analyst opinions and the ability to generate revenues, cashflow and earnings. They have to consider what can impact earnings – like supply chain disruption, reputational risk or terrorism – and how to deal with such risks,” said Mr Wertli. “Parametric solutions can help expand the insurability of risk, but risk managers will need data to create indices, and they also need think even more strategically,” he added. Parametric solutions are currently highly bespoke, relatively expensive and require lots of data. However, risk managers can get some of the benefits without the full cost by incorporating some parametric concepts into their existing insurance coverages, according to Steve Harry, risk financing sales executive at Marsh. For example, variable deductibles can be linked to an index. An energy company could tie its deductible to the price of oil, increasing the risk it takes in good times but scaling back when the price of oil falls. Similarly, parametric triggers could also be used in existing covers. For instance, an insurance payout for network disruption could be linked to website visits. To overcome challenges with parametric solutions, some firms are looking to “parameterise” coverages like increased cost of working in BI policies, or testing parametric cover in captives, explained Mr Harry. “It is very difficult to find internal measures and indices that correlate with risk. But rather than go down the road of a full-blown parametric solution, you can look to introduce the concepts into existing insurance. It is possible to tweak an existing programme rather than structure an entirely new deal,” he said.

Time for buyers to test parametric covers, says Airmic

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