Tanguy Tofut, CEO and co-founder of parametric insurance and risk transfer specialist Descartes Underwriting, expects strong growth for the parametric market, while the role of insurance-linked securities (ILS) investors in supporting parametric risk transfer structures is expected to grow. Well.
Speaking with Artemis in a recent interview around the annual reinsurance industry rendez-vous event in Monte Carlo, Tofut explained that 2024 is expected to be a good year for the parametric market, with potential for further growth.
“We expect strong market growth in 2024. Existing drivers such as an increase in natural disasters, both primary and secondary hazards, and tight markets should continue throughout the year,” Tofut said.
Adding, “We have also seen an increase in certain categories of business/occupations where it is becoming more difficult to find CAT capacity, which has increased the demand for parametric. For example, beach hotels in South East Asia or Florida etc.”
In terms of product development, Descartes has been seen as a leader in developing new parametric risk transfer and insurance opportunities.
Tofut said this focus will continue and he expects the use of parametric triggers to continue to grow in new areas of insurance, “as new products are launched into the market. Some will cover risks beyond climate risk, such as cyber, and we will see hybrid cover offerings that combine the best of both parametric and traditional indemnity approaches.
“Capital flows into the parametric risk sector over the past few years have also been significant, underscoring the widespread recognition of the value and growing importance of the parametric product offering in modern corporate risk management. “This will continue as we move into 2024.”
He also sees a growing role for the insurance-linked securities (ILS) market, recognizing the inherent attraction of a parametric trigger structure for investors.
“Capital markets will play a more important role in supporting parametric risk in the mid to long term,” he explained.
“The argument for ILS funds is simple: no low losses but clear “cut” and “reasonable” returns, with less uncertainty on the modeling side, as long as climate change is appropriately taken into account.
“Additionally, capital markets are looking for insurance investments that meet their ESG criteria. “Many parametric insurance products in mature and emerging markets will tick these boxes, especially as underwriting can play a key role towards a net-zero economy,” Tofut said.
On the subject of basis risk, Toft is optimistic and acknowledges that it is present in all insurance, parametric or indemnity, but highlights the role of technology and innovation in reducing basis risk.
“Basis risk is inherent in insurance, whether traditional or parametric. In the case of traditional insurance, different loss adjusters may arise with different loss estimates after notification of a claim, and contracts usually include many exclusions that can be complex for customers to understand. On the other hand, parametric players are working hard to reduce basis risk through technology and advanced data. “For example, if we cover forest fires to protect large plantations, for example, satellite imagery combined with AI-powered algorithms will assess losses better than loss adjusters,” he said.
Highlighting new innovative technology that can help us by stating, “Overall, we are able to use more and more data sources from the Internet of Things, satellites, and various sensors. Combined with new AI technologies, we can develop solutions that more fully and accurately reflect the risks insured and provide our clients with a more comprehensive understanding of their risks.
Importantly, Toft recognizes the need to bring parametric and indemnity coverage together, integrating one more closely with the other and resulting in a more holistic risk management solution, where parametric triggers play a key role in integrated reinsurance programs .
“Parametric insurance can both replace or complement traditional insurance. That being said, we expect to see more cover combining parametric insurance for speed and transparency for cat perils with traditional insurance for non-cat perils,” Tofut explained.
He estimated that, “There will be a significant increase in the market’s ability to create better parametric policies in full combination with traditional cover. For example, a customer can avail traditional indemnity for property damage, but all NDBI or financial losses are covered through parametric.
Finally also explaining that, “Due to the tightening market and capacity constraints, we also expect larger groups to require capacity from all sources, whether parametric or traditional.”
Read all our interviews with professionals from the ILS, reinsurance and risk transfer sectors here,