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While the focus for many is on what is still potential tropical cyclone nine and soon to become storm Helene on the Atlantic side, off the Pacific coast of Mexico hurricane John rapidly intensified and made landfall as a Category 3 storm which has resulted in enquiries from catastrophe bond investors.

As said, most of the insurance, reinsurance and insurance-linked securities (ILS) community are watching what is expected to become hurricane Helene moving around the Yucatan Peninsula of Mexico, but we’ve had a number of enquiries overnight about what hurricane John on the Pacific side of Mexico may have meant for the World Bank facilitated IBRD catastrophe bond.

Hurricane John made landfall on the southern coast of Mexico earlier this morning, impacting the region just south-southwest of Marquelia, Mexico in the state of Guerrero.

At landfall, the NHC puts hurricane John’s maximum sustained winds at an estimated 120 mph, while the storms minimum central pressure is estimated at 959 mb.

The enquiries we’ve fielded overnight from both catastrophe bond fund investors and some institutions that invest directly, are all focused on the Mexican government’s World Bank facilitated IBRD CAR Mexico 2024 (Pacific) catastrophe bond issuance.

Up to 12 inches of rainfall are expected with hurricane John, as well as a life-threatening storm surge and hurricane force winds, so it is a potentially deadly hurricane for those in its path.

But, after analysing documents related to the trigger of this Pacific coast hurricane cat bond, we can report that John is not sufficiently powerful to cause any loss to the Mexican governments parametric catastrophe bond.

The Government of Mexico secured $175 million of parametric Pacific named storm disaster insurance protection from the capital markets through the IBRD CAR Mexico 2024 (Pacific) catastrophe bond issuance back in May this year.

The Pacific named storm cat bond’s parametric trigger allows for a linear payout, from 25% upwards, depending on the parameters of a hurricane’s location and minimum central pressure.

In the case of hurricane John, which is estimated to have had minimum central pressure of 959 mb at landfall, that was too high to activate the parametric trigger of Mexico’s cat bond.

The Pacific named storm parametric catastrophe bond requires a storm with a central pressure of 937 mb or lower for even the lowest level of payout, 25% of principal, to be due.

As a result, the holders of this World Bank supported catastrophe bond are safe from any loss of principal.

Hurricane John is another example of a storm rapidly intensifying as it approached landfall and outperforming what many of the models had predicted even 24 hours prior to reaching the Mexican coast.

Had John began its intensification run a little further offshore and had additional time to strengthen and deepen, we might have been looking at a very different scenario for holders of these catastrophe bond notes.

You can read all about this IBRD CAR Mexico 2024 (Pacific) catastrophe bond and more than 1,000 other cat bond transactions in the extensive Artemis Deal Directory.

Mexico parametric cat bond safe from hurricane John’s 120mph landfall was published by: www.Artemis.bm
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Analysis from broking group Aon and Parametrix, a specialist in parametric cloud downtime cyber risk transfer, shows that it is possible to gain diversification within cyber portfolios that have cloud outage risk concentrations, with geography one way to achieve that.

Recall that cloud outage risk is one of the main systemic exposures in the cyber insurance and reinsurance marketplace.

For those focused on possible aggregation risks within cyber portfolios, cloud providers have been an area of growing focus.

This is driven a specialist market in cloud outage cyber risk transfer deals, which is where Parametrix focuses its efforts.

That company modelled the risks and acts as the parametric trigger reporting agent for reinsurer Hannover Re’s innovative privately placed $13.75 million Cumulus Re (Series 2024-1) parametric cloud outage catastrophe bond.

Parametrix also recently secured a $50 million parametric cloud outage cover for a US retailer, with backing from a range of re/insurers.

Which has helped to demonstrate both the demand for cloud outage protection, as well as how a parametric solution can be effective and even be securitized and backed by capital market investors.

As this segment of the risk transfer market grows, which seems inevitable given the exposure to cloud hosting providers and cloud-based software solutions is rapidly expanding, identifying how the cyber re/insurance market and those supporting such deals with risk capital can effectively diversify their exposure is key.

Rory Egan, Head of Cyber Analytics at Aon’s Reinsurance Solutions division explained, “Large cloud providers such as Amazon Web Services and Microsoft Azure are increasing in systemic importance, as organizations across the globe from all industries migrate business processes and data to the cloud, and software applications are increasingly cloud-based.

“Therefore the market-leading cloud providers understandably are a focal point for cyber aggregation risk managers. However, there is an opportunity to go beyond overly simplistic and conservative approaches when estimating exposure at risk, and potential losses stemming from cloud infrastructure outages.”

Explaining the rationale for the research, Egan added that, “By shedding light on how utilization of cloud infrastructure varies across the globe, this paper intends to help cyber (re)insurers credibly allow for the effects of diversification and redundancy when determining their exposure to cloud-related loss scenarios and optimizing their portfolio mix.

“With this research, we aim to increase confidence among (re)insurers to grow their cyber exposures through improved portfolio risk management. In turn this can increase the availability of risk capital and value of risk transfer solutions for organisations facing cyber risk, which is beneficial for the increasingly digitized global economy.”

Aon and Parametrix’s research found that portfolio risk of systemic cloud outage events can be reduced through geographical diversification.

It explains that, “The unique nature of cloud service delivery means that regionality plays a role in systemic loss events.”

Parametrix Analytics analysed Aon’s Global Industry Exposure Database, covering roughly $8 billion of cyber risk premium, meaning that the work covers more than half of the estimated global total.

Using its proprietary portfolio scanning and infrastructure analysis tools, Parametrix assessed the performance and interdependencies of critical third-party digital services among this representative group of actual businesses, the pair explained.

Summing up the findings as, “It shows how losses arising from cloud outage events can be diversified within large (re)insurance portfolios. A significant level of diversification can be achieved by underwriting portfolios of company risks that span continents, or are geographically distanced within the same continent. However, writing a portfolio which covers companies of varying sizes, but within the same continent, delivers less diversification.”

As cloud outage and related critical software and services exposures grow in the insurance and reinsurance market, it is to be expected that an increasing number of cloud outage specific risk transfer deals will be entered into, some of which will likely find its way to the capital markets.

Because of that, research that helps to demonstrate how portfolios of cyber risk can be diversified is an important input to growing the ILS market’s appetite for cyber risks in general and cloud-related risks specifically.

There are points of risk concentration, such as some of the major Amazon Web Services cloud infrastructure hubs.

The research from Aon and Parametrix states that, “Since diversification will not fully address the risk posed by accumulation of exposure to AWS us-east-1, other risk management actions are called for.”

One of these risk management actions is risk transfer, so reinsuring exposure to a cloud region of concentration, but the pair also highlight risk avoidance within portfolio management and risk mitigation for the insureds themselves, as both equally important options.

“In the past few years, the cyber (re)insurance market has focused on identifying and quantifying cyber aggregation events,” Crystal Boch, US Head of Cyber Analytics at Aon’s Reinsurance Solutions said. “We’ve made a lot of progress in this area and have highlighted the detrimental impacts these events could have on the industry and the economy, recently demonstrated by the CrowdStrike outage. There has been less focus on how insurers and reinsurers can diversify their exposures to mitigate the effects of these events on any one portfolio, this paper aims to make headway in this conversation.”

Sharon Haran, Head of Parametrix Analytics, explained, “The mainstream belief has been that diversification of cloud risk was almost impossible to achieve. However, our portfolio modeling uncovers the clear advantages to be gained by writing a portfolio that spans the globe. We now know how to help our risk carriers manage one of the two key systemic cyber risks.”

“We have been collecting data about the cloud and how companies use it for more than five years,” Haran continued. “By infusing Aon’s Global Industry Exposure Database with our own understanding of companies’ cloud behavior and reliance, we have distilled some concrete insights into the potential for cloud diversification.

“These key insights equip the industry with the tools needed to identify and transfer the risk, through advanced reinsurance solutions and ILS transactions.”

Cloud outage risk can be diversified, risk transfer still key: Aon & Parametrix was published by: www.Artemis.bm
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Some 27 years since I had my introduction to parametric triggers, one factor is still cited as holding back broader adoption, the issue of basis risk.

But there are now signals that suggest the industry is finally beginning to overcome this perceived coverage gap and has reached a stage in its maturity where perhaps basis risk won’t get the blame anymore, at least not every time.

Basis risk, the gap between coverage limits and actual payouts, or payout quantum and damage suffered. It’s an issue parametric insurance and risk transfer has faced since its infancy.

It’s hard for buyers to get over this issue, which under their typical approach to buying protection can look like a gap in coverage and so a risk or uncertainty they are not keen to assume.

Near-misses haven’t helped.

There have been near-misses, where parametric risk transfer structures failed to payout but the protection buyer felt they should have, going right back to the beginning of the market in modern parametric risk transfer (say mid-90’s).

Unfortunately many media sources, mainstream and B2B, often jump on these as headline opportunities without ever looking deeper to see how the protection buyer felt about that miss.

Often a basis risk miss is not seen as failure at all, just as one part of a holistic risk management strategy that wasn’t activated by that particular event.

I digress. Basis risk remains a key consideration for discussions of parametric risk transfer market growth.Of course, basis risk is also evident in indemnity insurance and reinsurance structures as well.

But, in many cases, it’s not the basis itself. It’s the lack of education about the risk, or even a lack of innovation in attempting to manage and minimise it, that really exacerbates the issue.

The insurance and reinsurance industry has a habit of sticking to what it knows best. Which means parametric triggers can be structured without thought as to how they are best integrated into programs and towers.

But this is changing, thanks to the growing wave of interest in parametric risk transfer and the growing number of innovative specialists in the space.

We now have truly innovative underwriting companies looking to push the parametric needle, while brokers are increasingly sophisticated in their parametric and holistic risk management offerings as well.

When it comes to basis risk in parametric risk transfer arrangements, things are moving on (finally).

While basis risk is never going away, it’s no longer something to be feared (or at least it shouldn’t be).

Think back to almost 30 years ago when the first of the parametric risk transfer structures that are similar to those we see today emerged.

They were simple and simplicity was encouraged at the time, in parametric trigger design.

The level of technological advancement in the insurance and reinsurance industry was relatively low back then.

The first parametric catastrophe bonds in the mid to late 90’s saw concentric rings and boxes drawn around locations, with different parameters used for different levels of severity responsiveness by triggers.

Sound familiar? Yes it was simple, but it’s not all that different to today and simplicity and transparency are still key for many parametric programs.

What has changed is how advanced the technologies underpinning risk models and analytics have become, as too have the structuring techniques, while the accuracy, reliability and range of data sources for trigger inputs is now expansive.

Which means parametric triggers can be designed to more tightly integrate with a protection buyers’ existing insurance or reinsurance program and tower arrangements, making for reduced basis risk.

But we believe the market can go further and we’re starting to see some parametric specialist companies taking basis risk reduction to another level.

We’ve seen brokers working with specialist underwriters to undertake a ground-up re-analysis of portfolio exposure and a reassessment of how risk is transferred, or reinsurance bought, for their clients.

This can drive insights that assist in dovetailing parametric risk transfer more neatly, closely matched and tightly integrated alongside traditional sources and types of coverage.

We’ve seen multiple reporting sources used, the hybridisation of indemnity+parametric structures, use of sensors, algorithms to derive indices, secondary data sources, and all important innovation around attachment points, sliding scales, one-shots, parametric sideways covers, stop-loss instruments.

The possibilities in parametric risk transfer are becoming much, much broader. Ultimately that’s good for the buyers and for the capacity providers as well.

All of these innovative risk transfer approaches can help to minimise and mitigate basis risk.

Most important is starting with a clean sheet, to look at a clients risk transfer and deconstruct the program or tower, only to then build it back up with elements of responsive parametric protection at its core.

We need to see more of this, as through this process (if a client is kept fully-engaged) the education that will be gained into their true need for risk transfer and risk capital, learning what type of protection and capital injection they need and when it will be most helpful, can actually make their entire program more efficient.

It is amazing what you can learn when you deconstruct the risk transfer structures of the past and look to rebuild them to include modern techniques and efficient responsive capital.

Which is why we’d say, don’t blame the basis risk. There are now a multitude of ways to manage and reduce it.

More importantly though, if parametric risk transfer is approached as part of a holistic overhaul of programs and towers, it often makes much more, perhaps perfect, sense as to where it should be integrated.

Some insurance programs and reinsurance towers haven’t changed in years, perhaps decades, and when they do, the change is not always with a view to modernise and incorporate responsive, modern layers of earnings and capital protection.

All of which is to say that education remains the main thing holding back parametrics, in our view. But it’s changing and improving, fast.

That and a lack of ambition in some quarters, it’s often simpler to stick with the structures that are known and accepted. But thankfully, the growing breed of parametric specialists and increasingly innovative specialists in brokers and re/insurers are beginning to change things.

One day we may not even talk about basis risk any more.

It will still be there. But, with education and ongoing modernisation of our approaches to and structures for risk transfer, as well as use of advanced tech, the basis risk just might not matter as more intelligent, responsive risk transfer becomes the norm.

Parametrics: Don’t blame it on the basis risk was published by: www.Artemis.bm
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Weather Risk Management Services (WRMS), a specialist Indian company that has created a successful business in offering agriculture and risk management services, including parametric or index-based climate and catastrophe insurance solutions, is targeting expansion in Latin America.

The company is to begin by entering markets across Latin America, naming Argentina, Paraguay, Colombia, Brazil, Chile, Ecuador, Peru, and Uruguay, but also with the rest of the countries in scope.

WRMS hopes its expansion to the region will help to promote and enhance climate resilience for sustainable growth in the area.

WRMA sees the region as ripe for targeting given it has a large agricultural sector, they are emerging markets, and feature increasing climate risk management awareness.

The company explained, “WRMS aims to bridge the protection gap by providing innovative risk management and insurance solutions designed to mitigate the financial impacts of climate events. This growth will also support the transition to a low-carbon economy through sustainable practices. The expansion efforts will focus on empowering local communities by building capacity and supporting their sustainable development initiatives. WRMS remains dedicated to fostering long-term resilience and sustainability, paving the way for a climate-resilient future in the region.”

Using the latest climate modeling tools and technology, as well as domain expertise, WRMS aims to create solutions that fit the local context and meet regional regulatory standards and cultural expectations.

WRMA aims to partner with local insurers, government agencies, NGOs, and agricultural cooperatives to aid in the implementation of its risk management and insurance solutions.

Using technology and hyper-local climate and socioeconomic data, the company will create insurance opportunities, using parametric trigger and index insurance techniques, to offer products such as cyclone insurance in Haiti and crop insurance in Honduras.

“The expansion in Latin America will prove to be one of the most significant milestones for WRMS, showing our commitment to support global climate resilience in some of the most weather-vulnerable regions,” said Mr. Anuj Kumbhat, Founder & CEO of WRMS. “We are committed to not only protecting businesses but also ensuring the sustainability of the local communities in these critical regions through our financial tools and customized solutions.”

WRMS expands parametric & index climate insurance solutions to Latin America was published by: www.Artemis.bm
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