The 2020 Atlantic hurricane season has been record breaking, at the time of writing (21st October), we’ve blown through 27 storms, second only to 2005's 28 storms. Eleven of those storms made U.S. landfall, shattering a record that had stood for 104 years. Now well into the Greek alphabet, hurricane Zeta was incredibly the third hurricane to slam Louisiana in two months. It would appear that Insurers have generally had a lucky escape – if Laura and Delta had tracked just 50 miles to the East or West, insured losses would have been a significant multiple of what is currently estimated. It’s too early to say what insured damage Zeta has caused.  

We’ve experienced a large uptick in parametric enquiries and deals bound in the year to date. Whilst we believe this is partly driven by the widely anticipated active Atlantic hurricane season, there are a number of other factors at play, which are echoed by many of the parametric insurers we transact business with:

Stuart Newcombe, Active Underwriter of Munich Re’s Innovation Syndicate at Lloyd’s comments, “2020 has been a particularly busy year for our parametric team and we anticipate this trend continuing into 2021 and beyond. The combination of premium increases, a busy storm season and much greater buyer awareness is driving the trend. Brokers have reacted and we have delivered pleasing results for insureds, with parametric solutions at the heart of innovative programmes”.

Hardening market conditions

Creative programme design is of paramount importance in today’s market in order to help mitigate rate rises and stricter terms. By introducing parametric insurance to supplement the traditional placement, the overall programme can be placed more efficiently.  

Coronavirus

Ambiguity and legal action around claim payments for business interruption hasn’t shone a favourable light on the insurance industry. Parametric insurance is fully transparent giving the insured total certainty that a claim will be paid in full, once the pre-agreed parametric triggers are hit. 

Covid-19 has also prompted many insureds to take a closer look at uninsured non-damage and contingent BI exposures. Parametric is effective at covering a broad range of financial losses, including NDBI and CBI, thereby plugging coverage gaps. 

Additionally, adjusting losses has been a particular challenge during 2020 due to travel restrictions, many of which are still in place. This has led to claims settlement processes being even more protracted than usual for indemnity policies. In contrast, the vast majority of parametric claims are settled within 30 days.

Increasing frequency and severity of other nat cat perils

The Midwest Derecho and California Wildfires are both estimated to be low double digit billion dollar 2020 insured losses. Tornado, hail and wildfire parametric products are all tried and tested solutions and can effectively address these exposures, which traditional property insurers are veering away from or charging disproportionately for.

Alternative capacity 

An increasing number of carriers are committing more capacity towards parametric solutions. Established players are deploying larger limits, Lloyd’s have earmarked parametric as a priority growth area and we are transacting with new entities focused solely on parametric insurance. The competitive parametric landscape and downwards pressure on pricing is great news for the corporate insurance buyer, particularly in light of rating pressure in the traditional market. 

Looking ahead

Parametric solutions are by no means new, they have been widely used by reinsurance buyers with the ILS market very well established. However, 2020 has been a real breakout year for parametric insurance for the corporate insurance buyer. Whilst many of our clients and insureds have had a keen interest in parametric solutions for a number of years now, the perfect storm of 2020 has seen the conversion from observers into users. With first time adopters being blown away by claims being paid seamlessly in record time, we don’t anticipate parametric insurance being a hard market fad. 

Looking ahead, product development will continue at a blistering pace with the increasing use of technology. Competition amongst parametric carriers will further intensify. Buyer awareness and uptake of parametric policies will continue on the upwards trajectory. We look forward to equipping our intermediary clients with innovative tools to help win and retain business.