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Survey Report

Insurance Marketplace Realities 2021 Spring Update – Alternative risk transfer solutions

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April 21, 2021

ART deals, whether simple, novel or innovative, supported by robust analytics and negotiated over realistic timeframes, fare better.
Rate predictions
  Trend Range
Structured programs: Yellow Line Flat
Parametric natural catastrophe
(nat cat)/weather programs:
Flat to increase +5% to 10%
Parametric pandemic programs: Increase (Purple triangle pointing up) +15% to +20%
Portfolio programs: Increase (Purple triangle pointing up) +5% to +15%

Key takeaway

As ART products are affected by the same economic pressures as their traditional counterparts, ART underwriters are acting conservatively in certain product categories, manifested as a preference for simplicity over the cutting edge. That said, all ART deals (simple, novel or innovative) that are supported by robust analytics and negotiated over realistic timeframes fare better.

Future pandemic protection

  • For large corporates, the marketplace is offering protection for lost revenue, lost gross profit or an increase in expenses from a non-COVID-19 pandemic event. These programs respond on a dual trigger basis requiring: 1) a World Health Organization notice (PHEIC or pandemic) and 2) either a breach of a pre-agreed level of cases or deaths in particular geographies or a civil authority action by a federal or state government in particular geographies.
  • As an extension, these programs can help manage the cash-flow impact of a second wave of COVID-19 through a multiyear structured (pre/post loss funding) component (not risk transfer).
  • We expect capacity to remain steady in 2021 at $100 million, although pricing has been driven higher by loss frequency and greater clarity on COVID-19 losses.

Structured solutions

  • While the greatest level of activity is in the property and casualty lines of business, structured solutions are becoming more common wherever traditional markets are charging rates-on-line (premium/limit) of 40%+ for a layer of insurance. We see increasing interest in fronting with structured reinsurance options to seek value outside of traditional approaches.
  • Structured solutions create a bridge between increased retentions and higher traditional market attachment points on hard-to-insure risk classes.
  • Typically three to five years in duration, these programs include significant pre-loss financing that aligns the insured’s risk tolerance with that of the insurers.
  • Sophisticated insureds increasingly apply this approach across multiple lines of business, using these products to help manage the cash flow impact of large losses while embracing their risk tolerance and securing risk transfer capacity for remote loss scenarios.
  • Insurers are becoming less flexible on funding requirements with greater scrutiny on credit analysis.

Parametric solutions

  • Natural catastrophe risks
    • Parametric hurricane and earthquake programs became very popular in 2020 due to the challenging property market compounded by COVID-19, which amplified the cost of natural catastrophe claims.
    • These solutions complement property placements by in-filling deductibles, topping up sublimits or covering uninsured risks (such as non-damage business interruption risk).
    • Their simple structure, use of independent data and quick settlement appeal to those insureds exasperated by long, drawn-out claim adjustment processes on prior catastrophe events.
    • While few see parametric solutions as a complete replacement for traditional insurance, parametric programs can provide an immediate source of liquidity in the event of a catastrophe while the insured gathers the data for their traditional insurance claim.
    • Markets are working to increase their available capacity for 2021.
    • For hurricane risks in the Atlantic basin, insureds are highly encouraged to renew/implement their programs early in 2021 to access optimal pricing and capacity. In 2020 we saw rates increase and capacity disappear as we approached wind season.
  • Weather risks
    • Parametric weather index products that address extremes of precipitation, temperature, humidity, snowfall, etc. are increasingly being adopted by insureds to hedge against non-damage business interruption events, especially with growing concern over climate change.
    • Activity is highest in the agriculture, construction, transportation, leisure and hospitality sectors, and buyers range from public entities to corporations of all sizes.
    • In the renewable energy sector, these products support the revenue generation of wind and solar assets over 10- to 15-year periods.
    • Insurers are keen to expand this sector to diversify their natural catastrophe concentration in their portfolios and protect against loss resulting from warm northern hemisphere winters.
  • Emerging indexes
    • Advancements in technology continue to expand the number of risks that can be addressed on a parametric basis. Emerging products cover hail, flood/surge, river height, lightning and wildfire risks.
    • Multiperil policies can be written using generic industry indexes (REVPar, Footfall) that are correlated to multiple risks.
    • Insureds’ own production data is now being used to settle the business interruption component of a property claim on a parametric basis, greatly simplifying claim settlement — enabling claims to close in days versus months.
  • Analytics
    • Parametric contracts are data driven, with claims being settled entirely on the value of the agreed data set. As such, they rely completely on a thorough analytical understanding of a risk and its correlation to a selected index.
    • Basis risk continues to be the key challenge and needs to be clearly understood by potential buyers.

Portfolio solutions

  • Capacity for multi-year portfolio solutions (or integrated risk programs) has diminished as ART units are forced to adopt the same underwriting restrictions imposed on their traditional monoline colleagues.
  • These markets increasingly focus on multiline stop-loss protection for a captive or for a portfolio of deductibles/self-insured retentions as insureds are forced to retain more risk to limit premium increases.
  • That said, those clients who previously established multiyear integrated programs are benefiting significantly by being insulated from market volatility and rate increases, at least until such programs renew.
  • Where there is stress, there is opportunity, and we do see signs of new market capacity being drawn into this sector (as well as into structured solutions).

Catastrophe bonds

  • COVID-19 created a distraction for investors during 2020, but by Q4 we saw renewed momentum, which is continuing in 2021.
  • Investors are focused now on minimizing losses from silent exposures, such as cyber, terror and pandemics.
  • Litigation may cause investors to reassess risk and increase fees if they feel they cannot rely on the courts to support the plain meaning of contracts.
  • Environmental, social and governance (ESG) investing will be an area of focus in 2021. Insurance-linked securities (ILS) arguably have favorable ESG characteristics, which is especially attractive to EU and Swiss investors. The outstanding question is how to translate the principles of ESG into specifics.
  • Using alternative capital to create more available and affordable insurance that is more accurately valued considering climate change would be ESG-positive. Collateral can also be ESG-positive where, for example, proceeds from World Bank notes fund sustainable development.
  • The experience of 2017 hurricane losses launched ongoing product innovation in the capital market sector to increase transparency and improve valuation techniques, liquidity and collateral structures leading to greater use of industry loss warranties (ILW) and index cat bonds.

Disclaimer

Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed subsidiaries of Willis North America Inc., including Willis Towers Watson Northeast Inc. (in the United States) and Willis Canada, Inc.

Each applicable policy of insurance must be reviewed to determine the extent, if any, of coverage for COVID-19. Coverage may vary depending on the jurisdiction and circumstances. For global client programs it is critical to consider all local operations and how policies may or may not include COVID-19 coverage. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal and/or other professional advisors. Some of the information in this publication may be compiled by third party sources we consider to be reliable, however we do not guarantee and are not responsible for the accuracy of such information. We assume no duty in contract, tort, or otherwise in connection with this publication and expressly disclaim, to the fullest extent permitted by law, any liability in connection with this publication. Willis Towers Watson offers insurance-related services through its appropriately licensed entities in each jurisdiction in which it operates. COVID-19 is a rapidly evolving situation and changes are occurring frequently. Willis Towers Watson does not undertake to update the information included herein after the date of publication. Accordingly, readers should be aware that certain content may have changed since the date of this publication. Please reach out to the author or your Willis Towers Watson contact for more information.

Contact

Derrick Easton
Managing Director, Alternative Risk Transfer Solutions

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