Despite its challenges, there is the potential for captives to write parametric solutions on a direct basis to insureds, according to Luc Schwartzbrod, head of risk finance & actuarial analytics at Aon Global Risk Consulting France.
Captives typically write parametric insurance on a reinsurance basis, as parametric insurance requires specialised expertise and complex risk management.
“We can definitely see a captive writing a parametric policy directly to the insured, with or without parametric reinsurance behind it,” said Schwartzbrod, speaking on the latest episode of the Global Captive Podcast.
Schwartzbrod said another interesting aspect of potentially using a captive for parametric risk without “adding another intermediary in-between” would be to set a different layer of triggers between the captive and the reinsurance behind it.
“For example, the captive could have a lower trigger to absorb the more frequent, lower-severity risks, while the reinsurance layer could be designed to take on the high-volatility, low-frequency risks,” Schwartzbrod said.
“This kind of structure could be very efficient from a capital optimisation perspective.”
Schwartzbrod, said direct parametrics would be challenging for captives, especially under Solvency II, because the capital requirements are closely tied to both the premium and the underlying risk.
Moreover, since parametric policies are typically written on a percentage basis using rate-on-line structures, it can be capital-intensive.
“However, by using reinsurance behind the captive, we can smooth out the capital burden and reduce it to a more manageable level,” Schwartzbrod said.
“Another challenge is finding a fronting insurer for the captive that’s capable of underwriting parametric policies. That can be a limiting factor in making the structure both viable and efficient.”
Data analysis and modelling are becoming increasingly important when it comes to ART, structured solutions, or parametrics placements.
“I think more clients are looking to utilise data and analytics to better inform the structure of their programmes,” said Guy Malyon, strategic broking director at Aon in EMEA for complex placements and ART.
“This becomes especially valuable when reporting up the trade chain to their finance leaders and other key stakeholders.”