Parametrics, a specialised form of reinsurance or insurance used mainly in catastrophe bonds, could become more mainstream as risk managers seek to overcome some of the limitations of traditional insurance, according to a survey.
The report, published by the Association of Insurance and Risk Managers in collaboration with Swiss Re Corporate Solutions and Marsh, found parametric solutions provide certainty of coverage and speed of claims resolution, particularly against complex and hard to insure risks such as disruption caused by ash clouds and pandemics.
Risk managers have started to use such cover in the travel, retail and agricultural sectors, and the report envisages that it could be applied more widely.
A next step could be to develop parametric products that protect intangible assets and the risk of cyber-damage.
Insurance buyers wishing to go down the parametrics route face a number of challenges and may need to acquire new skills, the report said. The data demands of parametrics are a particular concern and because the cover tends to be wider, it can be more expensive.
The study said insurance buyers need a good understanding of the organisation’s business model and risk landscape, and may need to gather support from senior colleagues such as the chief finance officer.
Airmic research and development manager Georgina Wainwright said: “This is an area of insurance that has the potential to grow rapidly, both in terms of the extent of its application and the number of companies that use it. It can provide more options and ultimately ensure that insurance becomes a truly strategic purchase.”
Christian Wertli, head of innovative risk solutions as Swiss Re Corporate Solutions, added: “Concerns about large, complex risks directly related to business operations are on the rise - it’s about protecting revenues.
“Parametric solutions can be used as a business tool to provide certainty and speedy access to liquidity when most needed. Risk managers are enablers and we can work together to develop highly bespoke protection.”
Steve Harry, risk finance consultant at Marsh’s financial solutions group, said: “Parametric insurance solutions can help firms reduce uncertainties around cover and cashflow arising from traditional policies and form part of their financial protection.
“For risk managers, taking the time to understand their firm’s ability to withstand future ‘shocks’ and gaining the support of the board are crucial first steps to incorporating parametric insurance solutions into their overall risk management strategy.”
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