Parametric solution take up rates grow “dramatically” in last year: Aon

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Take up rates for parametric risk transfer, insurance and reinsurance solutions have grown “dramatically” over the last year, according to broker Aon.

parametric-insurance-risk-transferIn particular, Aon highlights a rapid shift in both insurance market and corporate risk transfer buyers perceptions of risk transfer alternatives, which is helping to drive more rapid uptake of parametric solutions.

Aon notes a “continued shift” in perceptions of alternative risk solutions, including parametrics, through the first-quarter of this year.

“Historically, alternative risk solutions were seen primarily as a way to fill gaps left by traditional insurance. Now, with the explosive growth of data, and the availability of innovative analytic solutions, alternative risk solutions have become an integral component of effective risk transfer and financing strategies,” the broker explained.

Adding that, ” Indeed, corporate risk strategies now commonly include traditional insurance, reinsurance, and alternative solutions, informed and enabled by myriad data-driven insights.”

Appetite for alternative solutions such as parametric insurance and risk transfer “continued to strengthen” in 2024 so far, Aon reports.

In particular, parametric solutions are gaining prevalence as “insureds sought to support their retention strategies or close the protection gap.”

Property damage and business interruption portfolios are an area of some focus for buyers looking to narrow gaps in their coverage.

In Latin America, the uptake of parametric solutions has also been on the rise.

Aon’s Andrea Aguilar, Head of Strategy and Broking Commercial Risk Solutions Latin America, commented, “The frequency of natural catastrophe events has increased across the region, fueling ongoing challenging property market conditions. This environment calls for creative and efficient solutions, particularly when insurance programs exceed automatic treaty local market capacity and require facultative reinsurance.

“There has never been a greater need for alternative risk transfer solutions, including parametric solutions and captives.”

Anywhere that a traditional insurance or risk transfer solution cannot satisfy the full objectives of an insurance or reinsurance program, Aon advises parametrics are an alternative to explore.

In North America as well, momentum has accelerated for alternative solutions such as parametric insurance and risk transfer, “as the risk environment continued to grow more complex, data-enabled, and interconnected, as natural catastrophe-exposed risks continued to dominate underwriting agendas, and as C-suite perceptions shifted from traditional views of the insurance mechanism toward a more strategic view of insurance as a form of ‘rented capital’ to be included in a firms’ capital allocation strategies,” Aon explains.

Data, analytics and modelling can assist clients in understanding whether parametric triggers are the right solution for their insurance and reinsurance needs.

Aon notes that these tools and the abundance of data available today can help to “assess risk and inform decisions around risk retention thresholds, attachment points, indemnity periods, and policy limits, sub-limits, and terms and conditions,” which is critical for making decisions about the form of risk transfer to use and whether a parametric solution is appropriate.

As a result, “Take up rates of parametric solutions have grown dramatically over the past 12 months, especially for distressed perils and locations,” Aon said.

Adding that, “The benefits of parametric solutions include cashflow / liquidity stemming from quick payouts, broader coverage / fewer exclusions than traditional property insurance, and flexibility as to how loss proceeds are utilized.”

A notable example of this came to light recently, as we reported on the Government of Puerto Rico’s venturing into the catastrophe bond market for parametric disaster insurance protection.

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