Parametrics an “attractive & complementary” alternative: McGill and its partners
Parametric triggers in risk transfer can be a powerful tool, providing an effective way for policyholders and reinsurers to obtain responsive coverage that can be an “attractive and complementary” alternative to indemnity-based products, senior executives of the specialty insurance broker, McGill and Partners, told us recently.
Transparency is a key factor in parametrics, which inspires confidence in policyholders. Although they often require minimal information or input to work as intended, McGill and its partners view parametric insurance as a powerful mechanism capable of providing extensive coverage and paying claims quickly and with little hassle. , when it is most needed.
James Gunn and Nicky Payne, both reinsurance specialists at McGill and Partners, explained in a recent conversation with Reinsurance News that parametric triggers can be used to cover direct loss or damage, as well as event impacts. majors.
For example, a retail customer equipped with parametric protection against the eruption of a nearby volcano would receive their claim whether the impact of a qualifying eruption was caused by damaged property or business interruption.
“The fact that a parametric product can be placed with minimal information allows for a placement to be structured quickly and efficiently, without onerous inquiries,” said Gunn of McGill and Partners.
“The product can be effectively structured on a traditional basis (insurance or reinsurance) or in a derivative form, whichever suits best.”
In the wake of winter storm Uri and the European floods, the London-based specialist insurer has indeed seen its clients seek a more index-based product.
“We seek to understand and mitigate the basis risk inherent in these products,” Payne said.
“Parametric products are a powerful mechanism when fast and efficient recovery is needed or preferred – speed of reimbursement can mitigate or reduce the development of losses, which has a positive effect for the insured.”
Capacity isn’t an issue either, and Gunn told us that “meaningful limits are available to meet our customers’ larger capacity challenges.”
Gunn also noted that this doesn’t mean the settings are only for larger transactions.
“As the structuring costs are not onerous, this can also be used to tackle smaller challenges effectively,” he explained.
Parametric triggers have also become more in demand thanks to the pandemic, which has heightened awareness of the often understated threat of business interruption.
Payne commented that “the parametric product creates certainty for the client and eliminates questions about whether certain underlying assets or hedges are in scope, which is very relevant during Covid.”
Additionally, parametric structures are attractive to new sources of capital in the insurance and reinsurance market, said executives at McGill and Partners.
Payne further explaining that “new capital is also looking for other ways to get closer to the original risks and the product brings it either back on the insurance program or a step back via reinsurance.
“Some capital is looking for ESG-focused products, and because these programs are aggregated and tailored to class and territory, the product can be tailored to non-traditional carriers.”
In response to the growing opportunity for parametric risk transfer, McGill and Partners has established a Core Task Force comprised of colleagues from many industry sectors.
“We’ve worked with policyholders and reinsurers, either underwriting single-risk coverages on insurance programs or designing bespoke parametric coverage in Cedent’s portfolios,” Gunn said.
“This company is perfectly positioned to advise this type of product, having worked on a single P&L, providing access to customers and capacity across all teams.
“This should allow for a unique perspective on structuring, with the full support of our catastrophe modeling and actuarial teams.
“At McGill and Partners, the parametric team structures each contract on a bespoke basis to reflect the needs of its clients, while time is spent seeking to better understand and mitigate the basis risk inherent in these products and believing that they offer an attractive and complementary alternative option to our customers.
Finally, Payne highlighted some areas of interest for the parametric side of the re/insurance industry, suggesting that greater transparency is needed about actual transactions and transaction flow.
“New clients want to see the proof of concept because there hasn’t been extensive media coverage of investments and especially payments,” Payne said, but added that, “In the wake of Hurricane Ida, we have had confirmation of a large payment to a reinsured and the carriers are ready to pay in accordance with the contract.
“For some clients, the parametric product can be a great alternative, but it’s important to easily explain how a parametric product can fit into clients’ core re/insurance structures and ultimately demonstrate his advantages.”