Category Archive : Parametric insurance

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Broking group Lockton has announced the hiring of Paul Jones from Descartes Underwriting as its new Head of Parametric Solutions (UK & Europe) within its Property & Casualty (P&C) Specialties division.

paul-jones-lockton-parametricLockton is the latest broker to bolster its parametric risk transfer proposition recently, with this new hire, bringing onboard an experienced, commercially focused specialist in the space to lead activities in the UK and Europe and work alongside its international teams.

Jones will report to Andrzej Danyluk, Head of International Property, and Diego Monsalve, who serves as LatAm Head of Parametric Solutions, and will be tasked with further developing and growing Lockton’s parametric proposition, working alongside other parametric and alternative risk transfer specialists from Latin America, USA, AsiaPac and the UK.

His most recent position was at tech-focused parametric company Descartes Underwriting, where he served as Commercial Director for the UK and Ireland and worked for more than two and a half years.

Prior to that, Jones spent over 10 years at AXA XL and before that AXA Corporate Solutions, in a variety of P&C focused roles.

Danyluk commented on the new hire, “We are delighted to welcome Paul to Lockton, to build our European Parametric business. Paul is considered an industry leader in this field and his arrival will provide us with the platform to enhance our offering to both existing and prospective clients around the globe. This is a huge area of opportunity for Lockton and, as a result of growing demand in our Specialty businesses, Paul’s knowledge, experience and creativity will further enhance our ability to serve clients in an ever-evolving risk landscape.

“As Lockton continues to grow its international presence, this gives us greater ability to work seamlessly with our teams around the world to support our clients and partners by creating new products, supported by the best analytics and executed in a growing global marketplace.”

Jones added, “I am thrilled to be joining Lockton to develop its Parametric proposition to clients. It is a really exciting time to come on board and I look forward to working with Lockton’s specialists across the globe to develop the most innovative solutions for clients. The opportunities for growth are unparalleled and I am excited to build on the team’s momentum. I can’t wait to get started.”

Lockton hires Jones from Descartes to lead parametric in UK & Europe was published by: www.Artemis.bm
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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.

Parametric solution take up rates grow “dramatically” in last year: Aon was published by: www.Artemis.bm
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Descartes Underwriting, the parametric insurance and data-driven risk transfer specialist managing general agency (MGA), has hired former OTT Risk employee Matthew James as its new Commercial Director, UK & Ireland.

matthew-james-descartes-underwritingJames joins Descartes after ten years at broker WTW and then a stint as Head of Business Development in London for the now defunct parametric MGA OTT Risk.

At Descartes, he will be tasked with leading business development activities in London for the firms parametric insurance solutions.

In his time at broker WTW, James worked on structuring novel parametric solutions designed to manage the weather-risk exposures of clients across a range of industry sectors.

He then joined parametric MGA startup OTT Risk, again in London, but that company shuttered its operations in the first-quarter of this year.

At Descartes, James is taking over from Paul Jones, who is leaving the company after a near three year stint, to pursue other opportunities.

“We’re really excited to have attracted someone of Matthew’s experience and ingenuity as the new head of our London office,” explained Descartes co-founder and Chief Executive Tanguy Touffut. “His experience working with clients as a broker, assessing their climate and insurance challenges then crafting parametric solutions, will bring a new perspective to our work. Our restated strategy remains to deliver strong growth in high-potential markets, and Descartes will continue to deliver, in London and around the world.

“I’d like to thank Paul for his contribution to our development over the years. His work, particularly in educating new brokers to the benefits of parametric and developing and distributing coverages for peak peril exposures, has been invaluable. I wish him every good fortune.”

“I am super-pleased to be joining Descartes,” Matthew James added. “They are renowned as a leader in parametric insurance and I’ve followed their growth closely since their birth in 2018. The team of data scientists in Paris and London boasts some serious brains. Their depth of expertise and understanding of climate change’s impact on business is hard to beat. I look forward to working with this team at the cutting edge of parametric insurance, and alongside Ola Jacob and the rest of Descartes’ London team.”

Descartes Underwriting hires OTT Risk’s James as Commercial Director, UK & Ireland was published by: www.Artemis.bm
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The government of Puerto Rico is seeking $75 million in parametric insurance protection against the financial impacts of named storms and earthquakes from the capital markets, through a new Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond transaction, Artemis has learned.

Puerto Rico Parametric Re catastrophe bondThis first Puerto Rico Parametric Re catastrophe bond is particularly notable as the first cat bond to directly benefit the government of a territory of the United States.

It’s also worth highlighting that this is a very rare sovereign catastrophe bond that is being issued in the private market, to provide disaster insurance to the government of a country, with no intermediation or facilitation from any multilateral organisation, such as the World Bank.

As such, we believe this to be a very encouraging development, as this Puerto Rico Parametric Re Ltd. cat bond is a good example of how a government in a catastrophe-exposed region of the world can secure financing from the capital markets, with a payout that is contingent on a disaster occurring.

It’s also encouraging as it shows a model by which other US territories and States could secure financial support for disaster recovery, by tapping private capital markets.

That can benefit a government by, funding recovery from a disaster, as well as in providing budgetary liquidity at a time of potential stress, ultimately helping the recovery from a major catastrophe to be quicker and emergency funding to be deployed more rapidly.

Hence the use of a parametric trigger, for this first cat bond for the government of Puerto Rico, is no surprise, as it helps to deliver on the speed of settlement of any claims after a qualifying major natural catastrophe event, providing faster liquidity than a traditional insurance product might.

Puerto Rico, an island in the Caribbean that is an unincorporated territorial possession of the United States, faces hurricane risks each year and has been severely impacted by storms such as 2017’s Maria. The country also faces earthquake risks, so it makes sense for the government to be seeking parametric protection for both of these perils with its first cat bond deal.

The government of Puerto Rico has already been tapping traditional sources of insurance to help it plug disaster funding gaps, we understand, but now looks to the capital markets to augment this with a diversified source of insurance and a parametric trigger instrument to aid in faster payouts.

Helping Puerto Rico to access the capital markets for catastrophe bond coverage, Starr Indemnity & Liability Company, a subsidiary of Starr International, is acting as the reinsured party, so fronting the reinsurance protection for the government, specifically for its Department of Treasury (Departamento de Hacienda), we understand.

While Hannover Re is said to be acting as the reinsurer and will sit between Starr Indemnity, reinsuring it, while entering into a retrocessional reinsurance agreement with Puerto Rico Parametric Re Ltd. to transform the capital markets coverage, which will flow back to the government’s benefit.

Puerto Rico Parametric Re Ltd. is set to issue a single tranche of notes that will be sold to investors and the proceeds used to collateralize the retrocession agreement with Hannover Re.

Hannover Re then enters simultaneously into a reinsurance agreement with Starr Indemnity, which enters into an insurance agreement with the government of Puerto Rico.

A $75 million Series 2024-1 Class A tranche of notes are designed to ultimately provide the Puerto Rican government with an almost three-year source of disaster insurance protection, running to the end of May 2027, we are told.

The protection will be on a parametric trigger and per-occurrence basis, covering impacts of named storms and earthquakes for the country.

The parametric trigger features two boxes, a gold box that spans the entirety of Puerto Rico and a red box which is focused on San Juan and surrounding higher population and exposure density regions.

Different payout factors apply for the two boxes, with the risk of triggering highest should a hurricane or earthquake pass through or occur in the red box focused on the higher exposure region.

We’re told that hurricane risk makes up the majority of the expected loss for these notes, at more than 82%, and historical modelling shows that a repeat of 2017’s hurricane Maria would trigger the Puerto Rico Parametric Re cat bond.

There are also different payout percentages possible under the parametric trigger, dependent on the intensity of hurricane or earthquake, so the Puerto Rican government could benefit from payouts ranging from 25% of principal upwards with this cat bond, dependent on event severity, we are told.

The $75 million of Class A notes come with an initial base attachment probability of 3.07%, an initial base expected loss of 1.65% and they are being offered to cat bond investors with price guidance in a range from 8.5% to 9.5%.

As we said, it’s very encouraging to see a catastrophe bond like this that will benefit a government and is being issued in the private market.

It’s a clear demonstration of the government of Puerto Rico’s desire to narrow the protection gap that becomes evident when a major catastrophe strikes the island, as was seen with hurricane Maria.

You can read all about this Puerto Rico Parametric Re Ltd. (Series 2024-1) catastrophe bond and every more than one thousand other cat bond transactions in the Artemis Deal Directory.

Puerto Rico government seeking Parametric Re cat bond protection was published by: www.Artemis.bm
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NormanMax Insurance Holdings, the US based parametric insurance and reinsurance group launched by former Universal founder and CEO and parametric MGA New Paradigm co-founder, Bradley Meier, has now been approved for and launched its dedicated parametric syndicate 3939 at Lloyd’s.

normanmax-parametric-syndicate-lloydsThe company received in principle approval from Lloyd’s last year to launch what is the first parametric risk transfer syndicate in the market.

Syndicate 3939 has been launched in collaboration with Apollo Syndicate Management Ltd., which is set to manage syndicate 3939 for NormanMax.

NormanMax Syndicate 3939 has now commenced underwriting at Lloyd’s, with a focus on natural catastrophe parametric insurance and reinsurance products across the perils of hurricane, tropical cyclone, typhoon and earthquake.

The company said it intends to “combine 21st century data and technology to create parametric solutions for clients around the globe to address the natural disaster protection gap, at a time of increased climate risk and volatility.”

Stuart Newcombe, a former Active Underwriter for Munich Re Innovation Syndicate 1840, is set to act as Active Underwriter for NormanMax Syndicate 3939.

Newcombe’s expertise is expected to be crucial in guiding the syndicate’s strategy and underwriting, delivering on the commitment of NormanMax to innovative and efficient parametric re/insurance solutions.

NormanMax intends to leverage private capital and has partnered with Argenta Private Capital Limited, Alpha Insurance Analysts and the High Premium Group.

The company wants to “introduce a new age in catastrophe risk transfer at Lloyd’s,” and says that its private capital partners have been awarded freehold tenancy.

In addition, NormanMax said this morning that it has received backing from Helios Underwriting, the investment focused company that selects syndicates to back by deploying capital to support them.

Bradley Meier, CEO of NormanMax commented on the news, “This launch signifies the official start of the global parametric insurance revolution, and we are pleased to be partnering with Apollo on this exciting journey. As the landscape of risk has changed over the past three hundred years, so has Lloyd’s. Parametric insurance represents another milestone in Lloyd’s rich history of delivering relevant innovative products similar to when business interruption insurance was introduced by Lloyd’s in the early 20th century.

“I want to thank the amazing team of experienced (re)insurance professionals that I’ve been fortunate to be able to bring together who will be singularly focused on parametric climate solutions for natural disasters. We are especially excited to be joining the Lloyd’s marketplace and for the opportunity to access Lloyd’s global licenses and reach, to deliver parametric (re)Insurance products on a worldwide scale. With a commitment to best-in-class service, we are set to transform expectations and redefine possibilities within the parametric (re)insurance industry.

“I also want to thank the Lloyd’s team for all their help and support in preparing S3939 for its launch.”

Guy Carpenter and GC Securities advised on the Lloyd’s application and led the capital raise and reinsurance placement for NormanMax Syndicate 3939.

Vicky Carter, Global Capital Solutions, International said, “Guy Carpenter is delighted to have worked closely with the NormanMax team, using our in-depth capabilities in structuring and capital management to create the first parametric syndicate at Lloyd’s. Parametric products provide an innovative alternative risk-transfer solution that deliver transparency and ensure speed of payment. Such solutions can bridge critical insurance gaps, be distributed efficiently and at scale, and address issues around trapped capital. Demand for parametric products is growing and Guy Carpenter is committed to playing a central role in supporting the development of this market.”

Andrew Gray, Apollo’s Director of Strategic Partner Syndicates added, “This is a hugely exciting development for Apollo, NormanMax, and Lloyd’s, as we bring innovative, new natural catastrophe parametric products to the market. We are delighted to have been able to support NormanMax’s entry to Lloyd’s and very excited for what the future holds.”

David Ibeson, Apollo Group CEO also said, “This latest addition to our partnership family is further demonstration of our unique model of delivering a range of offerings to our clients by developing business with innovative and talented partners.”

Martin Reith, CEO, Helios Underwriting commented, “Helios Underwriting PLC is delighted to provide capital support for the launch of the NormanMax syndicate offering a diverse portfolio of parametric property products. This exciting development will provide critical and accessible coverage for clients against the occurrence of a specific, trigger based event for natural catastrophe exposures. We are thrilled to partner with Brad and his team to offer these pioneering solutions at Lloyd’s.”

Emily Apple of Alpha Insurance Analysts stated, ”Alpha is delighted to be a cornerstone capital provider to the new parametric NormanMax syndicate 3939. It offers a different and interesting approach to writing primary layers of catastrophe-exposed business around the world. We look forward to growing our position as the business develops.”

Robert Flach, Managing Director, Argenta Private Capital Limited (APCL) further said, “Argenta Private Capital is delighted to partner with NormanMax to bring syndicate 3939 to the market. This launch demonstrates the key role of private capital in the Lloyd’s market and our ability to access that strong, diverse capital base. This is a great opportunity for private investors to enjoy the returns from innovative natural catastrophe parametric underwriting. We are also pleased to have helped them establish their own corporate member providing underwriting capital alongside our private clients.”

Dhruv Patel OBE, spokesperson for the High Premium Consortium, that provided private capital capacity to NormanMax’s startup Syndicate 3939, stated, “The High Premium Consortium is delighted to provide private capital capacity to support Syndicate 3939. This milestone marks a significant step forward in our commitment to fostering innovation and growth within the Lloyd’s market.” He continued, “We are grateful to consortium member David Johns Powell, who negotiated the terms with NormanMax on which the capacity is provided.” Patel highlighted the innovative nature of NormanMax’s Syndicate 3939, saying, “We are particularly excited about the parametric opportunity that Syndicate 3939 brings to the Lloyd’s market.”

NormanMax parametric Lloyd’s syndicate 3939 commences underwriting was published by: www.Artemis.bm
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Howden, the global insurance and reinsurance intermediary, has announced the acquisition of parametric risk transfer specialist MiCRO (also known as the Microinsurance Catastrophe Risk Organisation), as it doubles-down on the use of responsive risk transfer to support resilience in under-insured communities.

howden-micro-acquisitionMiCRO launched as an index-based and parametric insurance company established in Barbados and founded by Fonkoze and Mercy Corps, back in 2010 in the wake of the devastating Haiti earthquake of 2010.

Donor capitalised at the time, MiCRO launched with a focus on providing index-based parametric insurance to bring affordable catastrophe cover to people in Haiti.

Quickly its parametric risk transfer structures proved their worth, being triggered after torrential rains and flooding in Haiti in 2011, then again by hurricane Isaac in 2012, hurricane Sandy in the same year, and a number of times since as well, our most recent coverage being in 2020 by tropical storm Amanda.

Over the years, MiCRO has also expanded its product offering, to provide catastrophe insurance that responds to business interruption, to cover additional perils and to new countries.

MiCRO had more than 180,000 active policyholders at the end of 2023, with a significant proportion being women, and smallholder farmers, Howden said in announcing the acquisition today.

Howden explained that the acquisition, “Underlines Howden’s strategy to invest in new solutions that use insurance as a ‘force for good’, in particular in emerging insurance markets, where demand is growing due to the increase in volatile weather events.”

It also reflects its, “Commitment to harness the power of insurance to empower vulnerable populations to become more resilient and adapt to the imminent peril posed by climate change.”

The acquisition is expected to power the expansion of MiCRO’s offering, including the range and reach of its parametric solutions through Howden’s international presence, its access to global markets, plus data and analytics capabilities.

Mercy Corps have now exited MiCRO is part of this acquisition, but it’s expected that ongoing collaboration opportunities will be explored.

Carlos Boelsterli, Chief Executive Officer, MiCRO commented, “MiCRO has achieved remarkable progress in recent years, and as we embark on further expansion, Howden emerged as a natural growth partner. I have been extremely impressed with their long-term commitment to the underserved and they are undoubtedly a business whose actions speak louder than words. In the face of the global challenge posed by climate change, it is essential that we empower marginalised communities with access to the correct insurance cover to cope with the volatility of tomorrow.”

Charlie Langdale, Chair, Climate Risk and Resilience, Howden, added, “At Howden, we firmly believe that the insurance market holds significant potential for fostering resilience among underinsured communities, enabling them to adapt to the future climate landscape, and microinsurance is one of the tools to achieve this. MiCRO’s proprietary data platform and exceptional expertise, both in parametric insurance but also in creating wider access to insurance will help us scale this important capability for those most at risk.”

Howden acquires parametric catastrophe risk specialist MiCRO was published by: www.Artemis.bm
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The Pacific Catastrophe Risk Insurance Company (PCRIC) alongside broker WTW have designed a parametric trigger to provide a responsive disaster insurance policy to a Papua New Guinea operator of a submarine fibre optic cable network.

papua-new-guinea-parametric-insurance-submarine-cablesThe parametric insurance policy will provide rapid payouts after earthquakes that are expected to result in damage to the submarine fibre optic cable network surrounding Papua New Guinea (PNG), that is operated by state-owned enterprise PNG Data Co.

With suitable coverage from the private insurance sector seen as unavailable, PNG Data approached PCRIC to explore the possibility of creating a bespoke insurance product to meet its specific needs.

PCRIC worked closely with WTW to deliver a solution that highlighted the benefits of parametric insurance as a way of providing financial protection when traditional coverage options are lacking.

The parametric insurance policy will provide rapid financing in the event of major earthquakes that could damage the undersea cable network, helping to ensure service continuity and enabling any necessary repairs to be made more quickly.

PCRIC CEO, Mr. Aholotu Palu, said, “We are indeed proud of our efforts to work with PNG Data Co., persisting until we were able to table a fully tailored solution to their insurance challenge. Such coverage marks a significant turning point in the development of our capability to provide non-sovereign insurance products to state-owned entities within the Pacific Islands region.”

PNG Data Co. CEO, Mr. Paul Komboi, added, “PNG Data Co. is very excited about the robust partnership now formed. We believe that this is a historic milestone for our region and a testament to our shared vision and commitment and look to continued engagement with PCRIC in the coming years. Our joint efforts truly showcase the merit of partnership and mutual commitment in addressing regional risk challenges.”

WTW Senior Director for Disaster Risk Finance, Dr. Simon Young, also said, “This was a collaborative effort between PNG Data Co, PCRIC and colleagues across WTW’s Alternative Risk Practice. We were pleased to contribute our experience in designing bespoke parametric solutions, along with our expertise in risk analytics, to create an insurance coverage for critical infrastructure which meets both the needs of the client and the requirements of the international markets, where WTW ultimately placed the risk on PCRIC’s behalf.”

PCRIC & WTW sell parametric quake insurance for submarine cable network was published by: www.Artemis.bm
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As per a new report from PwC, the inherent nature of parametric basis risk can be mitigated by improving the accuracy of models, refining index triggers, and ensuring high-quality data.

pwc-parametric-insurancePwC’s report observed that despite its many merits, one of the significant challenges associated with parametric insurance products is basis risk.

“Basis risk occurs when there’s a mismatch between the coverage of the policy and the actual event that triggers payment, resulting in the policyholder receiving a lower payout than expected or no payout at all,” PwC explained.

This can reportedly be driven by several factors, including the limited availability of high-quality data that accurately predicts the occurrence of an insured event, the lack of an accurate and up-to-date index or trigger mechanism that accurately reflects the event, and/or the imposition of rigid terms within the policy.

“This is a key risk for both insurers and insured parties, as it can significantly impact the effectiveness and reliability of parametric insurance products.

“This risk is inherent in parametric insurance due to the nature of its design – the payout is triggered by specific, measurable events, rather than the actual damage or loss experienced,” PwC stated.

In light of this, the firm noted that basis risk can be mitigated by enhancing data quality, monitoring and evaluating the parameters of the policy, diversifying insurance parameters or complementing with traditional insurance covers.

“Reducing basis risk in parametric insurance typically involves improving the accuracy of models, refining index triggers, ensuring high-quality data, and designing policies that align as closely as possible with the insured’s true risk profile,” the firm added.

PwC concluded that while no solution can completely eliminate basis risk, a “multifaceted approach” can significantly reduce it.

Tailored policies, dynamic indices can help mitigate parametric basis risk: PwC was published by: www.Artemis.bm
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Industry loss warranties (ILWs) remain a useful and well-established instrument within the capital management toolbox of risk carriers, but do have their drawbacks, some of which can be mitigated or removed entirely by a parametric structure, according to Skyline Partners.

skyline-partners-logoAs parametric insurance, reinsurance, and retrocession structures continue to grow in popularity, Artemis spoke with Laurent Sabatié, Co-founder and Executive Director, and Ken MacDonald, Strategic Advisor of Skyline Partners, a full-service provider in the parametric insurance supply chain.

ILWs are an indexed-based reinsurance instrument which pays out when the estimated total industry-wide insured loss arising from a specific, covered event or group of events exceeds an agreed threshold, as calculated by a third party.

They can be used to cover a dead or live cat event, and Sabatié explained are often purchased by cedants as a back-up cover to protect their balance sheets when multiple sequential events during the same storm season occur or are feared.

But while ILWs are both useful and well-established, Sabatié stressed that they’re certainly not without their limitations, including the issue of basis risk.

“They typically use market-loss data compiled by commercial entities or major reinsurers to determine when an ILW is triggered for payment. This is inherently inconsistent with any specific cedant’s actual value at risk. The inconsistency is exacerbated by reporting gaps which leave total losses underestimated or based on guesswork,” said Sabatié.

“Perhaps worse is the long wait for settlement,” he continued. “ILWs – by design – do not pay until the industry loss has settled, or at least comfortably exceeds the trigger point. The naturally long period required to calculate a reliable industry loss can, in the extreme, be many years. In the interim, the cedant may not be able even to recognise the reinsurance recovery in their P&L.”

Expanding on the limitations and issues surrounding ILWs, MacDonald highlighted both a lack of flexibility and a potential lack of transparency.

“Their structure is very rigid, with trigger conditions that take no account, for example, of variations in risk profiles across portfolios, or the evolving nature of tropical cyclone risk.

“The ILW market operates predominantly as an over-the-counter market, with limited regulatory oversight, and therefore transparency, relative to traditional reinsurance markets,” said MacDonald.

Another negative, according to Sabatié and MacDonald, include the fact the scope of the ILS coverage is limited geographically, as areas not covered by third-party industry loss collation services cannot be covered by ILW instruments.

Further, calculation of total loss is often underestimated because certain types of losses may be excluded from industry loss calculations, explained the pair.

According to Sabatié and MacDonald, the answer to these limitations with ILWs, is the parametric structure, which does share some characteristics with ILWs.

“They too can be index based, but they are triggered for payment when a specified event occurs, with no regard for the total (and irrelevant) industry loss arising from the event. They minimise or eliminate many of the issues associated with ILWs,” said Sabatié.

Starting with the basis risk issue, Sabatié told Artemis that parametric triggers can reduce basis risk as they can be designed to align very closely with the actual damages caused by an event to a specific re/insured portfolio.

“Through pre-event analysis of its exposed values and location coordinates, coverage can be designed to react with precision to relevant events, reducing basis risk substantially compared to ILWs.

“The trigger events – or “parameters” – of the index, and the loss scales created and adopted for a specific coverage contract, can each be calibrated to minimise remaining basis risk. This may apply, for example, to the intensity triggers of the index such as windspeed, days of excess temperature, or the order of the event during a coverage period. Adjustment can be used to ensure triggers align with cedant objectives regarding the attachment and/or exhaustion probability of specific economic loss tranches, as well as budget,” said Sabatié.

Adding, “This alignment ensures triggers match the modelled cat losses used in reinsurance purchasing and capital modelling. The parameters can even be optimised to align with the distribution probability of the cat losses that inform not just the overall reinsurance placement, but also the capital modelling behind it. They are, therefore, fully integrated within the purchaser’s enterprise risk management framework.

“Alignment makes the value of parametric coverage is much greater, because it focusses more accurately on the reinsured’s specific exposures, not those of the entire industry.”

Another benefit of a parametric structure is that claims settlement is extraordinary efficient, with settlement often within a calendar month of the triggering loss event.

“Reduced administrative burdens provide faster, certain access to funds underpinning liquid capital. The beneficial financial impact of parametric reinsurance can be recognised much faster,” said MacDonald.

“Settlement is much simpler than with traditional indemnity-based reinsurance, which may also be said of ILWs, but with parametric reinsurance payments are not delayed while industry-level losses are calculated and left to develop. Nor does inflation decrease the relative value of the recovery while you wait.

“This lightning speed of settlement also benefits reinsurance capital providers by eliminating trapped capital and removing concerns over loss creep,” he continued.

The flexibility of parametric structures, explained Sabatié, means that coverage can be tailored to match the risk, which ensure better pricing as cedants pay solely for protection that matches their exposure precisely.

Additionally, Sabatié noted that coverage is broader than with an ILW, as any type of economic loss with a covered event may be reimbursed by a parametric reinsurance structure, including intangible exposures such as loss of access.

“Parametric triggers are highly flexible and can be tailored to respond to parameters which precisely meet each cedant’s specific needs. Triggers may take into account factors such as geographic location, risk profile, historical incidence, and/or almost anything which can be shown to contribute to loss and quantified. Payment structures can be varied to account for changing values at risk, or future changes of conditions. Risk nuances can therefore be measured more effectively and covered more advantageously. Nor is parametric reinsurance limited to nat cat exposures. It has been used to reinsure perils ranging from cyber to marine cargo,” said Sabatié.

Commenting on some additional, major benefits of a parametric structure, MacDonald explained that, “Parametric reinsurance structures typically operate in well-established regulated markets which ensures greater transparency and oversight relative to ILWs. Insurers can therefore gain access to a broader range of potential counterparties, and benefit from the expertise and financial strength of established reinsurance players. Most of them are already active in parametric.”

He also underlined that regulated parametric products do not rely on uncertain Letters of Credit or unrated capital, which gives cedants reassurance over the reliability and stability of their reinsurance arrangements.

“With lower basis risk, better counterparties, closer alignment with modelled outcomes, and a regulated nature, parametric reinsurance qualifies as Tier 2 Capital under European solvency rules. This is in stark contrast to ILWs which are considered derivative products,” said MacDonald.

“In Parametric vs. ILW, parametric reinsurance wins on transparency, certainty, responsiveness, simplicity, speed of payment, and balance-sheet benefits. Skyline Partners, the parametric catalyser, has everything it takes to get parametric reinsurance structures designed, built, and operational. We work daily with brokers, cedants, captives, and reinsurers alike to deliver the winning parametric advantage,” concluded Sabatié and MacDonald.

It’s important to note that ILW’s and parametrics both play an important role and are well-suited to specific situations, with some protection buyers even using the structures to complement each other within their coverage arrangements.

We suspect both will continue to play these important roles, but as technology advances and use of data becomes increasingly sophisticated, the basis risk associated with them will increasingly be minimised and the structures themselves refined, with their protection honed and improved.

Parametric structures minimise or eliminate limitations of ILWs: Skyline Partners was published by: www.Artemis.bm
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When Jamaica first ventured into the catastrophe bond market it was with the support of donor funding that paid the premiums for the 2021 issuance, but with its successful renewal issuance of the cat bond settled this week, it transpires that Jamaica has this time paid for the protection out of its own funds.

Jamaica World Bank catastrophe bondJamaica had previously secured $185 million of hurricane insurance protection on a parametric trigger basis back in July 2021.

Financial support to get that first Jamaica cat bond to market came from the United States government through the US Agency for International Development (USAID), the World Bank’s Disaster Protection Program with funding by the United Kingdom, and also the Global Risk Financing Facility (GRiF) supported by Germany and the United Kingdom.

The cost for that first cat bond for Jamaica is said to have been roughly $16.5 million and while the funding came from foreign donors, as we reported before Jamaica was keen to budget for its renewal itself.

The country’s Minister of Finance Dr. Nigel Clarke had previously explained that Jamaica would look to pay the renewal itself, with a paying down of the countries debt seen as a prerequisite for that.

With the help of new tax laws and increased budget revenues, it’s been reported that Jamaica has roughly halved its debt over the last decade.

In 2021, when its first catastrophe bond was issued, Jamaica’s debt to GDP ratio was said to be around 95%, but by 2024 this is reported to have fallen to below 70%.

That has helped by providing room in Jamaica’s budget for it to pay for the $150 million IBRD CAR Jamaica 2024 cat bond out of its own funds.

Fitch Ratings said in a note on Jamaica’s cat bond renewal, “Jamaica will be responsible for annual payments of USD10.5 million, equivalent to a 1.0% increase in interest costs or a 0.2% increase in total expenditures.”

Jamaica is responsible for the 7% risk margin payments, while the World Bank will pay the small 0.19% funding margin and SOFR costs, the rating agency also explained.

Fitch also noted that the risk margin for the cat bond renewal was higher than the matured issue, saying, “The higher cost of funding reflects both higher interest rates and the market’s assessment of increased hurricane risk.”

It’s testament to the success of the World Bank’s project to issue a catastrophe bond for Jamaica, as well as to the financial management of the country now being on a steady improvement path.

There was financial support, we believe, as we had reported the notes from Jamaica’s second catastrophe bond will be listed in Hong Kong and presumably the country has therefore been able to offset some of the service provider costs using the Hong Kong ILS Grant Scheme.

But the premiums themselves are being paid for by Jamaica itself, providing an important example to other countries that might look to the catastrophe bond market as a source of disaster insurance protection.

Also read: Jamaica pleased with second World Bank cat bond, Hong Kong support: Minister of Finance

Jamaica using own funds to pay risk margin on World Bank catastrophe bond renewal was published by: www.Artemis.bm
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