Hurricanes Helene and Milton highlighted deficiencies in some parametric covers: WTW

By Henry Gale

May 6 - (The Insurer) - Hurricanes Helene and Milton in 2024 highlighted deficiencies in some parametric programs, WTW said in the spring update of its Marketplace Realities report.

The broker said some programs using a single-peril cat-in-a-circle structure, one of several types of parametric policy, were shown up by the hurricanes.

These policies trigger claims if a storm's track passes within a certain radius of the insured location and its maximum windspeed meets an agreed threshold; the catastrophe occurring within a circle gives rise to the moniker "cat-in-a-circle". The claim amount usually varies according to the hurricane's maximum wind speed and its track's proximity to the insured location; closer and more severe storms trigger larger payouts.

Under this structure, it is possible that a policyholder could suffer a loss from a hurricane without those conditions being met, and receive no payout on its parametric policy. Similarly, a storm could cause severe damage to a policyholder, but its windspeed and track might trigger a relatively small payout.

This possibility is called basis risk and is also a feature of indemnity-based insurance policies, where certain losses are excluded or deducted from coverage. In the case of Hurricanes Helene and Milton, WTW said the parametric covers' deficiencies were linked to the size of storm systems and the role of storm surge and excess rainfall as drivers of loss.

Hurricane Helene was distinctive for its size, as tropical-storm-force winds extended further away from its eye than is typical for hurricanes. As a result, Helene's track may have passed outside the circle specified in some cat-in-a-circle parametric policies while the storm caused damage at the insured location.

Both hurricanes also caused storm surge and rainfall, which windspeed-focused parametric covers may not respond to. However, brokers and insurers in the parametric market have increasingly been using structures more complex than single-peril cat-in-a-circle to take into account more ways that hurricanes can cause losses.

"Parametric products continue to evolve, leveraging data sources and deploying multi-faceted indexes to ensure robust response during events," WTW said.

Instead of simply taking a storm's maximum windspeed and track, some parametric covers additionally use minimum central pressure as a trigger to respond to storms where wind damage might not be as high, but low pressures cause rainfall or surge damage. Other data sources used for parametric hurricane covers include local windspeed data derived from complex models and on-the-ground measurements, and storm surge-specific triggers.

WTW's Marketplace Realities update also provided an update on alternative risk transfer rates. It said parametric nat cat covers are renewing in the range of down 5% to flat, while structured programs are also seeing pricing pressure bring insurers' risk margins down.

The available capacity for both parametric and structured (re)insurance has increased, the broker said. WTW also observed parametric covers increasingly being targeted at middle-market and smaller companies, after becoming established for large and complex firms.