NEWS
Parametric bolstered by coverage gaps in traditional insurance
Natural disasters, heat waves and economic downturns highlight need for parametric insurance market, argues Skyline Partners.
Global events such as economic downturns and the COVID-19 pandemic have highlighted the gaps that remain in traditional insurance and shown the world that other options, including parametric, need to be looked at.
This is according to Laurent Sabatié and Gethin Jones, co-founders of Skyline Partners.
Sabatié highlighted that the continuously hardening market will open up opportunities for new products and for ways of covering the gaps and supporting underwriters and brokers through challenging conditions.
“We can see the use of parametric growing in such market conditions because gaps are widening. A lot of underwriting conditions make it very difficult to place certain risks,” he told Monte Carlo Today.
Sabatié continued: “We’ve seen a lot about natural disasters, floods, hurricanes, and wildfires on the news and this is offering opportunities for parametric, which is becoming a toolbox that people will want to use in the value chain to cover these gaps.”
According to Sabatié, the biggest challenges that the industry is facing at the moment include inflation, the cost of living crisis, and the cost of repair, all of which significantly impact the insurance industry on the buyer and the seller side. But, he added, parametric solutions are immune to inflation effects and market conditions because the terms are fixed in advance.
However, Jones said, many people who still see parametric as a last resort solution are missing what it is really about.
“We can see the use of parametric growing.”
Laurent Sabatié, Skyline Partners
“When we’re looking at the benefits of these types of structures, because a lot of the structuring work is done up front, in insuring an event and the impacts of that event, the payments are very quick,” Jones said.
He added: “Scenarios where you need quick access to liquidity is where we should be focusing with these products, but also we’re looking at the non-physical damage-type losses. Again this is where parametric works extremely well and where a traditional indemnity market perhaps doesn’t have the right types of solutions.”
One of the challenges for parametric is around trying to educate people and showcase where it works, Jones said, adding that it should not be looked at as a straight replacement for an existing cover on a traditional basis.
Sabatié said it should be considered in relation to non-physical damage, and avoiding adjustment and administration costs, and linked to an event instead of a loss.
He added that parametric can’t solve economic issues or inflation or the cost of living crisis, noting that it is “not a silver bullet”.
“But traditional products are easily impacted by market conditions and economic downturns because you make a promise 12 months in advance,” he continued.
Sabatié added: “If inflation is rising, it could be detrimental to the buyers and to the underwriter and at the same time, the prices are constantly increasing. With the market cycles also having an impact, it becomes almost impossible to buy insurance and to get the right value. That’s where we can help to bridge that gap.”
Main image: Shutterstock / kristof lauwers