Recent deals in construction, agriculture and real estate are moving parametric mainstream, with even reputational risks being examined for cover
Parametric re/insurance is turning towards non-damage business interruption (NDBI) covers, to add to its foothold in weather risk transfer, according to Aon’s global head of weather risk, Kurt Cripps.
Satellite data or online clicks for sales are just some of the tools that can be used, he suggested.
Recent transactions have included construction, agriculture and real estate industry deals.
“Weather risk is an increased concern, because while there is plenty of data, weather patterns are changing and we’re seeing more extreme weather. However, I think NDBI will take over what we do,” Cripps told Insurance Times’s sister publication GR.
Cripps noted a recent NDBI deal for the hotels sector, which used the Smiths Travel Research Index to monitor revenue per available hotel room. “That deal involved two triggers: if revenues dropped 20% below the monthly index; and if the client cannot service its debts,” said Cripps.
He said parametric solutions meant Aon could be creative with clients and brainstorm ideas.
“We brainstorm with clients and aim to be entrepreneurial. I’m ambivalent on capital. One day it can be insurance, another day reinsurance, or hedge fund or ILS capital,” he said.
“We’ll sit down with clients and discuss what we might do, and if you can’t do something on a traditional insurance industry basis, think about using an index,” said Cripps.
Chief financial officers in particular are keen to reduce earnings volatility. “It’s a question of whether to hedge off volatility or keep it on the balance sheet,” said Cripps.
Some clients are using parametric covers to supplement existing re/insurance, he said. Using an independent dataset, agreed to in advance, also cuts costs and litigation risk.
“Parametric is attractive because of the speed at which it can provide immediate cash post-event. That attractiveness is also about reducing the cost of doing business, particularly if you’re spending 40 cents in every dollar on lawyers, brokers and other fees.”
Aon’s parametric solutions are being matched by reinsurers.
Swiss Re UK business development manager Matt Reeves says social media is being examined.
“Social media mentions can be aggregated to determine whether their reputation is good or whether it has dipped.
“With enough back-data, we can build indexes and create a parametric solution that meets their needs. It is a very simple solution: if the index moves by a certain amount, the policy will pay out – no loss adjustments are required and there is no lengthy claims process.”