Elevated natural catastrophe activity this year has made property and casualty coverage challenging for Canadian policyholders. But there’s one type of insurance that’s benefitting from the hard market: parametric.
“The hardening of the traditional market has led insureds to think of alternative ways they can transfer their nat cat risk, and a parametric product is a great tool to add to the risk management toolbox,” said Youssef Abdul Baki (pictured), vice president of innovative risk solutions at Swiss Re Corporate Solutions.
Baki spoke to Insurance Business on the sidelines of RIMS Canada 2023 about the notable growth and awareness of parametric products.
“We’ve definitely seen a lot more interest in using a parametric cover to infill a large nat cat deductible or plug in some of the gaps and exclusions under a traditional insurance policy,” he said.
Demand for parametric solutions is growing in Canada’s west and pacific northwest coast, where there are significant earthquake exposures, as well as in the eastern provinces, which see a lot of hurricane risk, according to the Swiss Re VP.
“More and more insureds are interested in parametric coverage [not just] to protect their physical assets, but also the non-physical damage, such as business interruption and the financial loss associated with an event,” Baki said.
Use cases for parametric insurance are also expanding across different industries, making parametric an exciting area of innovation for the industry.
“I think an interesting application of parametric insurance is in construction because we can structure a parametric cover over a multi-year term to basically mimic the term of a construction project,” Baki said.
Parametric can complement a builders’ risk program, for example, or add a layer of protection to construction projects facing significant delays or an increased cost of materials due to an earthquake or hurricane event.
“We’re seeing a strong use case in the construction space, but there are applications in almost every industry, because of the broad use of the funds,” Baki added. “There’s a wide spectrum of industries and clients that this product can be a good fit for, including retail, hospitality, energy, and healthcare.”
Parametric insurance policies contain index-based triggers based on the characteristics of an underlying event rather than the actual loss sustained, which makes them a great complement for traditional policies.
In an earthquake policy, for instance, the trigger for a claim can be the magnitude of an earthquake within a pre-defined geometry or the ground shaking at a certain location. Similarly, hurricane triggers can include wind speeds at certain locations or the hurricane intensity within a pre-defined geometry.
“That’s one of the great things about parametric insurance. There are different ways you can structure these covers,” said Baki.
Though awareness of parametric policies is growing, Baki noted that education is an ongoing endeavor for brokers and clients. But he also hopes that the burgeoning field of parametric insurance will attract younger talent to the industry.
“We’re doing a lot to educate on the value of these products. But I think there’s been great progress, and the use of parametric is just continuing to grow more and more,” Baki told Insurance Business.
“It’s different and innovative, and I do hope it attracts more talent to the insurance industry. What I really enjoy about this space is that all parties come to the table together – client, broker, and insurer – to try and customize a product that best fits the client’s needs.”
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