Parametric Solutions Can Address Difficult Risk Transfer Challenges

On a black computer keyboard, the J key is green and replaced with the words Risk Transfer.

August 13, 2021

On a black computer keyboard, the J key is green and replaced with the words Risk Transfer.

Parametric insurance solutions hold the potential of allowing captive insurance companies and their parents to more easily and efficiently transfer difficult risks, according to several speakers at this year's virtual Vermont Captive Insurance Association (VCIA) annual conference.

In three different Ignite Talks, VCIA conference speakers addressed various aspects of parametric solutions' potential.

Eddie McLaughlin, chief commercial officer, EMEA, Global Risk Consulting at Aon, noted that parametric solutions have been in use for the past few decades in the utility sector and for energy weather trading. "It has been around for quite some time, albeit the advances of the past few years are quite astonishing," Mr. McLaughlin said.

Parametric coverage is based on two factors, a trigger such as the intensity of a natural catastrophe event and the geography the insured is seeking to protect, Mr. McLaughlin noted.

Because the independent data trigger and payout amounts are predefined, recovery is very quick, typically 30–45 days, he said. With those rapid payouts, a parametric insurance solution can help provide needed liquidity to an organization following a catastrophe.

An existing captive insurance company can help facilitate the parametric transaction, Mr. McLaughlin said.

In a separate VCIA conference Ignite Talk, Steven Bauman, global programs and captives director, Americas, at AXA XL, noted that one use of parametric coverage could be to pull a particularly difficult weather concern out of a broader property program and address it with a parametric solution.

"When you isolate that parametric and put it in your captive, your captive can take a share of that," Mr. Bauman said. "So, the combination of a parametric program into a captive makes really good sense."

In a third talk, Marcus Schmalbach, founder and CEO of Ryskex GmbH, discussed the Digital Risk Exchange (DREx) that will soon allow Vermont captives to use parametric trading to transfer risks to the capital markets.

"The Digital Risk Exchange is a project of the VCIA in cooperation with Ryskex and aims to give captive owners in the state of Vermont the opportunity to trade their risks to the capital markets via a blockchain-based exchange," Mr. Schmalbach said.

Mr. Schmalbach noted that the $175 trillion capital market is 350 times the size of the reinsurance market, "giving us almost unlimited opportunities." Meanwhile, "the parametric solution simplifies risk trading," he said.

"The Digital Risk Exchange is designed to be very cost and time-efficient," Mr. Schmalbach said. "The risk exchange is almost fully automated, and even complex and large claims will be settled within 48 hours."

In addition, contracts can be traded and prices adjusted to reflect changing conditions, as on stock or commodity exchanges, he said. "The captive can, therefore, sell risks but also buy them at the same time and develop into a profit center in the long term and strengthen its own position in the group," Mr. Schmalbach said.

DREx is scheduled to come online in January 2022.

Mr. McLaughlin said "innovation is constant" around parametric risk transfer solutions. "We're looking at COVID transactions; we're looking at a whole range of non-nat cat," he said.

August 13, 2021