Interest from captives in parametric solutions is increasing, particularly in the property market where insureds are looking at managing rising insurance costs.
Captive Intelligence published a long read in September examining the potential for more captive involvement in parametric structures, and specialists Descartes believe the time is right for greater adoption.
“We’ve seen a growing interest from captives in parametric solutions,” Meryl Bermond, business development manager at Descartes Underwriting, told Captive Intelligence.
She said a key driver is parametric structures allowing captives to charge the “real price” of a risk for the period covered.
“We always price the risk itself, according to past events, not past losses,” Bermond explained. “That makes all the difference, because it allows the captive manager to understand the real price of the risk.”
Bermond said this is important when a captive is involved, because “at the end of the day, the captive pays the losses”.
Descartes is a carrier that primarily writes natural catastrophe related parametric policies in more than 60 countries around the world.
The company underwrites and innovates against natural catastrophes across a number trade sectors to provide insurance for events such as floods, earthquakes, cyclones, hurricanes, hail and wildfires.
“In terms of natural catastrophes, captives are usually very interested in covering the perils that are difficult to model, such as flood and hail, because they are very complex,” Bermond said.
“Some traditional insurers struggle to price them, and some of the models are not up to date for these risks.”
Bermond highlighted that hail risk in France is currently heavily under-priced by the traditional market.
“We are waiting for the next round of losses, when we expect the market price will realign and exceed the real price of the risk, then begin to decline again,” she said.
“Parametric prices, in contrast, are much more stable.”
Bermond said when underwriting for a captive, the first job is to price the pure peril risk.
“That could be, for example, that the level of water in the Seine River in Paris exceeds six metres,” she said.
“To do this, we model maybe 150 years of historical data to recreate thousands of possible years of loss experiences.
“Then, with all those potential scenarios, we set the price to insure Seine River flooding above six metres.”
She explained that for the second step, they utilise the captive’s own data on its past losses, and back-test the solution based on actual experience.
Bermond told Captive Intelligence that the services Descartes can offer captives are quite “diverse” and includes options such as fronting and captive protection.
“With insurance captives, the captive writes the policy and then we reinsure the captive,” she added.
“We also have cases with reinsurance captives, where we front the parametric policy, keep part of the risk, and reinsure the rest into the captive.”