Growing demand for parametric insurance in 2024: AM Best

Record cat bond issuance and large spreads indicate a strong demand for reinsurance capacity, leading to continued interest in parametric-triggered reinsurance and insurance-linked securities (ILS) in the first half of 2024, according to AM Best’s latest report.

In the first half of 2024, six natural catastrophe bonds with parametric triggers were issued, accounting for about 7% of the total issuance volume, up from 6.2% in the same period of 2023.

Government entities are increasingly turning to the cat bond market for parametric reinsurance. Notably, the first parametric-triggered cyber catastrophe bond was issued in early 2024. Sponsored by Hannover Re, the Cumulus Re (Series 2024-1) bond covers cloud outages. This marks a shift in parametric risk transfer techniques from traditional weather and seismic events to other types of risks.

You can read more about this transaction, and all others, in the catastrophe bond and ILS Deal Directory of our sister publication, Artemis.

Additionally, Vermont updated its protected cell law to support various parametric structures, underscoring the growing interest in this type of coverage.

Government use of parametric coverage was prominently demonstrated in July when Hurricane Beryl struck the Caribbean. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) made payouts under parametric policies, including a record $42 million payment to Grenada. The transparency of parametric triggers enabled CCRIF to process payments within 14 days of the event.

The clear and predictable nature of parametric triggers appeals to both capacity providers and cedents, as it reduces uncertainty and may encourage providers to cover additional risks and regions, offering investors more diversification in their ILS portfolios.

“Reinsurance covers based on parametric triggers complement indemnity-based covers, rather than directly substitute for them. They can be used by insurers to plug holes in reinsurance towers for earnings protection, particularly in the harder-to-place lower layers. Or they may be used when indemnity coverage is simply not practical, as in the case of the parametric cat bonds reinsuring governments. Sponsors that use parametric coverage must be comfortable with basis risk and the potential for over- and under-recoveries. However, advances in data and analytics may help sponsors better understand the extent to which a parametric trigger correlates with the magnitude of loss they might incur during an event,” AM Best explained.

A recent poll by Reinsurance News highlights that there are still challenges to the global adoption of parametric insurance. Addressing these challenges is crucial for unlocking the full potential of parametric insurance and enhancing its role in providing fast and reliable financial protection against emerging risks. The most effective approach is to use parametric insurance alongside traditional indemnity-based reinsurance rather than replacing it. Parametric covers can help insurers address gaps in their reinsurance strategies, especially in areas that are difficult to insure or where indemnity coverage is not practical.

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