Target Markets panel: Parametric growth to continue with public sector leading the charge

By Chris Munro

May 22 - (The Insurer) - The parametric insurance market will maintain its double-digit growth trajectory in the coming years with the public sector likely to continue leading the specialist segment’s expansion, although the base of buyers will broaden over time.

Those were just some of the points raised during a panel discussion at the Target Markets Program Administrators Association Mid-Year Meeting in Dallas in May, with speakers highlighting the rapid growth of the sector.

Unlike traditional insurance and the requirement for detailed scrutiny of each loss, parametric coverage provides buyers with quick payouts based on various predefined conditions.

Parametric protection is triggered when specific events take place, for example a natural disaster, weather event or another occurrence that can be measured and modelled.

While growing in prominence, the sector remains in its early stages, with Abigayle Claflin, vice president, business development and strategic alliances at Palms Insurance, suggesting that even the biggest players in the market will be writing less than $100 million of parametric premium each year.

Claflin said that some new entrants have set themselves hefty premium volume targets, which she cautioned against.

“I don't know that those (targets) are reachable, but I also don't think that it's a bad thing to have lower targets and start and grow,” she said.

“Fundamentally, if you have this big number you're trying to hit, then you're going to grab everything that comes towards you, as opposed to taking it slow, (and) making sure that you're maintaining your aggregates.”

Generally though, the expectation is the sector will continue to grow at a significant pace.

Amwins’ executive vice president, alternative risk, Alex Kaplan, said he expects his company’s book of parametric business “will double at least every five years, so a 15% annual growth rate in premium”.

“Obviously that’s going to be ebb and flow, maybe there’ll be a couple of larger deals that come through that skew the book a little bit, but I think that’s a very fair target,” Kaplan said.

The Amwins executive said following COVID-19 and during the recent hard market, submission volume for parametric business “went up 500%” in 2023, while the bind ratio “went up 200%”.

“COVID, even though that's not theoretically an event that would have been covered under a parametric structure, I think it forced people to ask questions like, ‘Okay, here's the worst that ever happened to me in my business, and it wasn't covered. What other things can happen to me where I might have an impact that is not going to be resolved by the current coverage that I have in place?’” said Kaplan.

Those questions led people to inquire about parametric solutions.

Scott Carpinteri, president of K2 Parametric, said the market is growing, but he reiterated that parametric coverage should not be regarded as a replacement for traditional indemnity insurance.

“Indemnity insurance … does a great job for a lot of stuff and it shouldn't be replaced. But there's some things it can't do,” he said.

“I think for any buyer that's exposed to a peril that is able to be sold on a parametric basis, they can benefit from some coverage on a parametric basis,” Carpinteri added.

As to the growth potential of the parametric market, Carpinteri said it is hard to make precise forecasts, but at a “hip shot” prediction, he suggested the sector could ultimately account for around 10% of the overall property market.

However, panellists made clear that the specialist protection can be applied to a far broader range of business lines beyond the property insurance market.

Kaplan said there is “a general misunderstanding in the market”.

“Parametric insurance is not property insurance. It should not be confused. It can serve that purpose, but that's not what it is. It's balance sheet protection,” he stated.

As Kaplan explained, “it's not just about the physical assets”, but instead how independent variables influence a business’s performance.

Clients can be left surprised about how parametric products can provide financial protection for those variables, Kaplan noted, with many often believing they could not insure such exposures and instead take that operational risk “on the chin”.

“As long as there is a definable parameter, (and) there's a robust, quality, tested data set that underlies it, you can design a parametric around almost anything,” Kaplan said.

Alongside greater awareness of the protection that parametrics can provide, panellists said the products are increasingly available to a wider audience.

Five years ago, the assumption – largely accurate, the panellists said – was that parametric products came with a minimum premium of at least $150,000, and if clients did not have that much to spend, then providers were not interested.

“That's because it was so resource-intensive, and a $50,000 deal was just as much work as a $5 million deal,” said Kaplan.

However, with greater streamlining and optimisation of the internal processes supporting the transactions, the protections can now be offered to a broader client base.

“By having these absurdly high minimum premiums, it boxed up 90% of the addressable market,” said Kaplan.

But the market now has “a tremendous amount of flexibility in terms of the perils, the minimum premiums, etc., and so you have a lot more smaller entities engaging with the parametric space now than five years ago,” he detailed.

Brian Espie, chief underwriting officer at wildfire-focused MGA Kettle, said a major factor in that shift in enabling a wider group of clients to entertain purchasing parametric products is “a liberation of data or technology that's available to help define the parameters”.

Another key factor is parametric underwriters’ open mindedness, he said.

“We are generally agnostic when it comes to the underlying exposures. The asset itself, whatever we are covering, is generally not going to influence the probability of the triggering event,” Espie explained.

Since the parametric market started to grow in prominence, the public sector has been one of the largest buyers of the coverage.

Indeed, Kaplan said the sector “is an outsized buyer of parametrics in the U.S. relative to, I would say, almost any other class”.

The reason for that, Kaplan said, is “because they need speed and they need flexibility” when it comes to getting funds in the wake of major events.

While other sectors will turn to parametrics, Kaplan believes the segment will continue to see “outsized growth” within the public sector.

“The federal government is basically to a point now where they're saying, ‘We're just not going to pay for your problems anymore’,” he said.

“If you look at FEMA disaster declarations in the 1980s, we averaged one disaster declaration every 16 days. In 2020, we averaged a disaster declaration every 26 hours, so it's an unsustainable trajectory that we're on.”

Kaplan said the federal government will “wash their hands of this”.

“FEMA is going to do what it was originally intended to do which is be a coordinating emergency management body and not be this bottomless pit of money … They’ll shift more of the burden onto those public entities, and I think a lot of them will go the route of parametrics.”