Interest around parametric insurance is growing, but the actual quote-to-bind ratio for these policies is still relatively low, Chris Sutton, partner in speciality broking at McGill & Partner, told Captive Intelligence.
Parametric products are good fit for captives because they have direct access to internal company data, while the automatic pay-out function of parametric insurance streamlines the claims process.
“There is a lot of interest and discussion around parametric placements, which is understandable, but when you speak to a parametric underwriter or brokers like us, you’ll find that the quote-to-bind ratio is generally quite low — around 20% to 30%,” Sutton said.
Sutton said clients sometimes comment that it is difficult to articulate the benefits of parametric placements within their own organisations, particularly when discussing with their CFO, treasurer, or legal team, as they can differ significantly from traditional indemnity policies.
“Adding a captive into the mix introduces another layer of complexity,” he added. “A key perception surrounding parametrics is the issue of basis risk.
“This arises when an event occurs that does not match the exact conditions of the parametric policy, potentially leading to a coverage expectation and a coverage gap.”
Sutton said captives can address the basis risk concern by layering additional coverage and broadening the response of parametric policies.
“This creates a real opportunity, although it is early days rather than being widely implemented at this stage,” he said.
“However, I believe interest in this area will continue to grow over time, especially among sophisticated clients.”
Stephen Cross, group COO & head of innovation & strategy at McGill & Partners, highlighted that when US employee benefits were first being written in captives it was a challenging process, though as a greater number of deals were completed, a more standardised approach emerged.
“The same can be seen in parametric insurance, and it takes time for these innovations to gain traction,” he said.
“For example, insurance-linked securities (ILS), were virtually non-existent 20 or 25 years ago, but now they are quite common, along with cat bonds.”
Cross said the insurance industry is good at developing new products, which may eventually gain acceptance or simply fade away.
“Finite reinsurance, for instance, was popular in the 1980s and 1990s but diminished as auditors became concerned about excessive reliance on reinsurance,” he added.