Technicality and simplicity key to Mexico's multiperil parametric deal: Lockton's Monsalve

By Henry Gale

Aug 18 - (The Insurer) - The multiperil parametric insurance program now in place for the government of Mexico aims to hit a "sweet spot" by providing a technical solution that is simple to understand, Lockton's Diego Monsalve told Parametric Insurer.

Lockton, in partnership with Berkshire Hathaway Specialty Insurance, was selected last month to provide the Mexican government with approximately $270 million of multiperil parametric coverage, as first reported by Parametric Insurer.

Mexico's ministry of finance and public credit and government-owned insurance institution Agroasemex "were very clear about what they wanted", said Monsalve, head of risk practices for Latin America and Caribbean insurance services and international head of parametric solutions.

"We were able to listen to what they were looking for … and that's what we tried to deliver in the process," he added.

TECHNICALITY AND SIMPLICITY

"We try to be technical but very simple," Monsalve continued, saying that overly technical parametric solutions with many triggers can be too complicated for clients' needs. "I think we got the sweet spot in showing the client very technical stuff, but at the same time, very simple to understand," he added.

"One of our basic principles when designing FastCAT parametric solutions is simplicity over complexity," said Akshay Gupta and Alin Radu, head and deputy head of parametric solutions at BHSI. FastCAT is the name of BHSI's range of parametric natural catastrophe offerings.

"Complexity does not equate to accuracy," they continued. "Many times you see complex structures being designed to overfit the historical perspective, but those structures may not respond well in the future.

"Parametric structures must be simple and transparent, both in terms of analytics and settlement data, for it to be trusted by the customer and the industry, and also pay fast when the insured needs it the most," Gupta and Radu said.

"For tropical cyclones, for example, we designed and calibrated bespoke structures using our cat-in-shape product with a maximum windspeed and minimum central-pressure dual trigger, while responding to customer concerns."

CUSTOMISATION AND ITERATION

Monsalve said the teams worked on several iterations of the structure before the final version. A lot of data processing was required to analyse different options and minimise basis risk.

The program covers hurricane risks across Mexico's entire coastline and earthquake risk over the whole country. "You have to analyse the seismicity: it is different in Mexico City than in Oaxaca than in Cancun," Monsalve said.

As well as hurricane and earthquake risks, the program also covers excess precipitation and volcanic eruption risks.

Monsalve said the cover for eruptions was the first of its kind in the region, with a trigger based on volcanic plume height. Gupta and Radu added that the trigger is consistently reported by "trusted primary and back-up public agencies".

PLACEMENT

"I have to give kudos to Berkshire Hathaway because they were very proactive," Monsalve said, praising the insurer's involvement in the policy's structuring.

Parametric Insurer reported last month that the Mexican government had issued a tender for the parametric coverage and that brokers needed to have selected a lead insurer to submit a bid. Lockton chose BHSI as the lead market for its bid.

"Our teams worked around the clock across multiple time zones to design optimal structures to respond best to (the client's) requirements," Gupta and Radu said. They added that "complete transparency, respect and trust" between Lockton and BHSI's teams allowed for objective discussions and iterations.

The full placement has now been completed and the coverage is in place. It was "200% over-placed", Monsalve said, adding that the pricing was competitive and that some companies that do not normally underwrite parametric coverage participated in the placement.

Monsalve also emphasised the importance of collaboration between different parts of Lockton in structuring and placing the coverage, including those managing local relationships in Mexico, dedicated parametric structuring capabilities and the broker's London market parametric team.