UK buyers buoyant on future of parametrics

Insurance buyers are still getting to grips with parametric insurance, and stress that it remains a bit of an unknown for many in their industry, with more use cases needed before the alternative risk transfer (ART) solutions really begin to take off. But they are confident that the option will soon become a much more widely used tool and appear keen to learn. Very interestingly, one participant in the UK leg of our European Risk Frontiers survey would like to see parametrics used more to provide payouts that help companies avert a loss before the risk even strikes. Richard Hoult, previously head of risk and internal audit at Portakabin Ltd, said that parametrics solutions don’t quite makes sense yet for many firms. “We need to see the value in it and we’re not quite there yet. We need to see more use cases. The more use cases you have, the easier it is for insurance managers to go back to their leaders and say ‘look, this is what this company did’. But I still think it’s early days,” said Hoult. He believes that while some insurance buyers understand how parametric cover works, many don’t. “Then there are those that understand how it works in theory, but are finding it difficult to apply it to their own business, or the data requirements are currently too heavy. People often don’t want to be the first movers, particularly in an area like insurance,” he said. “But with climate change, like many other businesses, we could use this as a tool in the not-too-distant future. I think as climate change starts impacting more and more, people will generally start looking at parametric as part of the normal insurance process,” he said. Kate Loades, global insurance director at Arcadis, added that if companies have a big nat cat then exposure parametric makes sense, but said they remain “a bit of an unknown” solution for other risks. “However, I’m really keen to consider all options, including parametrics. In my role, you’ve got to challenge your risk-financing programmes to make sure they still provide the optimum structure and deliver,” she said. George Ong, partner at IRIS (Innovative Risk and Insurance Solutions) Partnership, a not-for-profit organisation that supports students and professionals in the risk and insurance community, said he has used parametric solutions to cover winter freeze and summer drought, with both options proving successful and paying claims on several occasions. He thinks that weather-related parametric insurance can grow in scope as a stand-alone policy, as well as part of an add-on to traditional property damage business interruption, covering the non-damage element. “This is especially the case where there is a large deductible,” said Ong. He also thinks there is real potential for parametrics to grow into other areas where quality of data allows, and triggers and payouts can be determined. Ong thinks this form or ART can go a step further and help the insurance industry move beyond offering capital to cover damages to a forward-thinking resilience model that can provide money to help organisation avert risks before they strike “Take, for example, a cyber insurance programme,” said Ong. “If cyber experts can identify that an insured is very likely to be attacked with accurate details, it may be considered as a ‘trigger event’ and insurers could release funds to remove the specific risk exposure. Such an approach would be very much cheaper and better reputation management compared to a post-attack payout, which would normally require the replacement of IT infrastructure, data recovery and prolonged business interruption.” “Undoubtedly, there is still much to consider in the development of such a parametric cyber programme, but the benefits are enormous and would make cyber insurance become more affordable to many organisations,” he concluded.

UK buyers buoyant on future of parametrics

Could parametrics anticipate loss and payout to avert risk before it strikes?

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