Why parametric options should be on every broker’s radar

Advising clients of parametric options will allow brokers and insurers to enhance their value and open up opportunities to provide more options for risk transfer and solutions to coverage issues that couldn’t be solved under traditional measures, says an insurer executive.

Focusing on parametric coverage means giving clients the ability to get more customized coverage, with triggers at different levels, to address specific challenges, said Urs Uhlmann, CEO and chief agent at AXA XL Insurance Canada during a recent webinar.

“I think we all have reason to be excited because this is new, this is fresh, this is a bit different and addresses risk that, at least to some part, our customers are currently retaining,” he told attendees of the Insurance Institute of Ontario’s webinar, The New Case for Parametric Insurance. “I think it opens the door to entirely different conversations for our brokers and for us with our customers.”

He gave two reasons for his excitement. First, insurers can tackle risks and help clients transfer away risk for which they are footing the bill. Secondly, it allows clients to get innovative in the types of coverage they want while enhancing what companies can do to help them.

“So it gives a new option that currently is not around. Otherwise, we’re all used to battling for the same business year after year after year again,” Uhlmann said. “Here’s an opportunity that, I think, creates economic value to our customers and of course gives us an opportunity to move forward.”

Clockwise from top left, Matthew Zuccato, from Marsh Alternative Risk Solutions, Urs Uhlmann from AXA XL Insurance Canada, Manuel Chirouze, of Guy Carpenter and Jason Arbuckle of Axis Re, take part in the Insurance Institute of Ontario’s webinar, “The New Case for Parametric Insurance.”

These coverages would offer clients protections from weather-related events that may not fall under the natural catastrophe category. And, like all insurance policies, there needs to be an indemnity trigger.

“Most of our lives and our customers’ lives are impacted mostly by weather, but also other things that are measured and indexed properly,” Uhlmann said.

Uhlmann provided examples such as frost insurance, something that a winemaker might interested in as they risk being exposed to cold temperatures that could destroy a harvest. In the example, a solution could outline that if a certain temperature is reached between a certain timeframe — say below zero degrees between April and May — then the coverage is triggered

“Then we start paying an agreed amount, depending on how cold [it is] and how long it lasts,” he explained.

As the temperature dips lower, greater payout options are available as the winemaker loses more, or perhaps all, of their harvest. “So frost insurance is simply triggered [based] on the temperature.”

Another example was for a fish farm and the impact of cold water. Because the fish are on a farm, they can’t move to a more hospitable location when the temperature dips. “There is a way there as well to deal with the temperature impact of the water on the fish and, consequently, the economic impact to the insured,” Uhlmann said.

Or, take the impact of a mild winter on a gas provider, in which its revenue is dependent on a cold winter. If it is too warm, less gas is used and the provider can suffer an economic loss. “Clearly, a simple solution to take the edge off the risk that, currently, customers assume themselves could be a parametric solution,” he said.

And if it’s a colder, snowier winter and a municipality has to plow snow more often — and blows through its budget for the season — that could be covered with this type of solution as well.

“So lots of opportunities any which way you think about it,” Uhlmann said.

For clients looking at a parametric solution, the insurer is going to need to know what the risk is and what they want to cover. “We certainly want to look at historical losses — how do they actually correlate to each other. That’s extremely important. We provide some feedback after that review. I believe the feedback on its own is worth a lot. It helps the customer quantify the actually exposure, which before they probably just did by gut. This will provide insight on the actual quantity,” Uhlmann explained.

And these could be crafted to deal with just about any size of budget. “You just may not get as much money, depending on what happens. Or maybe your threshold moves up,” he said. “So there are many ways to accommodate the customer’s budget to deal with it.”

Feature image by iStock.com/Georgijevic