Parametrics Unlock Solutions For Future Risks

Parametrics Unlock Solutions For Future Risks
April 23, 2024 7 mins

Parametrics Unlock Solutions For Future Risks

Parametrics Unlock Solutions For Future Risks

Macrotrends are transforming our world and creating emerging property-casualty exposures, which will have profound implications for the insurance industry.

Key Takeaways
  1. The flexibility of parametric triggers are helping to create innovative answers to emerging risk exposures.
  2. Parametrics can attract meaningful capital to support the energy transition.
  3. Shared mobility will demand a change in our approach to risk transfer.

Megatrends including trade, technology, weather and workforce are shaping the future of risk and it is apparent that parametric risk transfer presents a compelling solution to many of these significant challenges.

Unlike traditional insurance, which indemnifies the actual loss incurred, parametric solutions are structured and priced on the probability of a predefined event happening. A payout is triggered if certain event parameters are met or exceeded - such as wind speed or temperature - that are related to an insured's particular exposure. Other triggers can include market indices, crop yield, or power outage. An important characteristic of parametric cover is its transparent and fast claims payment.

Energy Transition

Parametric solutions will likely play a significant role in the energy transition. While solar parks are being installed worldwide, these locations can be susceptible to natural hazards such as hail – and the traditional market struggles to provide limits that satisfy lender and project finance requirements. To prevent such projects being cancelled, parametric insurance can attract meaningful additional capital that the traditional market cannot provide.  

CO2 capture is another opportunity. Techniques involve carbon capture, transportation, storage, and then the final use of the captured gas. A parametric structure in marine cargo, for instance, could provide a payout in the event that the CO2 isn’t transported on time, or fails to reach the destination. From a storage perspective, significant risks, including natural catastrophes, could be addressed by parametric coverage. 

Sustainability, nature and biodiversity loss is a growing socio-economic issue where costly restoration may be required and even mandated. Parametric policies have already been pioneered whereby a trigger, such as wind speed in a defined location, facilitates a fast payout for immediate damage assessments, debris removal and repairs. Other examples could include wildfire protection for forests or protection of wetlands against drought. 

Panoramic Parametric

Shared mobility - another trend identified in Aon’s Transformative Trends report - which involves a hybrid model of private vehicle use with public transport, calls for a rethink of traditional first and third party risk transfer. Parametric coverage to deal with concentrations of risk in catastrophe-exposed areas could extend beyond physical damage loss on owned assets, to include exposures such as business interruption.

Similarly, the transition to electric vehicles (EV) challenges the traditional market, particularly the reliance on batteries. Parametric risk solutions can foreseeably address EV battery performance, not just in cars but also in areas such as battery home storage and larger scale renewable energy storage facilities.  

Intellectual property (IP) was also featured as a significant transformative trend in the report. Often, IP has a growing share in the overall enterprise value of businesses, creating a need to cover IP impairment, for example as a result of a cyber event. Triggers for a parametric solution could be associated with cloud outage, extended downtime and associated data loss. A secondary trigger could potentially be linked to the value of the IP, although this is a challenge given the inherent subjectivity with valuations.

Meanwhile, the metaverse, a 3D-enabled digital space that uses virtual reality, augmented reality, and other advanced internet technology, is evolving fast. But the metaverse is vulnerable to cyber events – intentional or otherwise – causing cloud outage and downtime. There are certain parametric cyber triggers that can be used here to address associated losses that are not easily available in the traditional market.

Innovation Imperative

The emerging risks facing businesses and society shouldn’t be seen only from a loss perspective. Transformative change brings uncertainty and volatility, and therefore new demand for protection. 

To fulfil its role as financial shock absorbers – and to stay relevant – the re/insurance industry must respond with innovative risk solutions. Importantly, such products must also be attractive to a range of capital providers. We think parametric insurance fits the bill, helping insurers navigate new areas of volatility, while building business resilience. 

Aon’s Thought Leader
  • Cole Mayer
    Global Head, Parametric

General Disclaimer

This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.

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