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Survey Report

Insurance Marketplace Realities 2022 Spring Update – Alternative risk transfer solutions (ART)

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April 7, 2022

Parametric and structured solutions continue to be the focus of the ART market in 2022.
Rate predictions: Alternative risk transfer solutions (ART)
  Trend Range
Structured programs Neutral Flat
Parametric nat cat weather programs Neutral decrease increase -5% to +5%
Parametric weather index programs Neutral increase Flat to +5% (+20% to +30% Asia)
Parametric pandemic programs Neutral Flat
Portfolio programs Increase (Purple triangle pointing up) +15% to +30%
Captive stop loss Neutral increase Flat to +5%

Key takeaway

Parametric and structured solutions continue to be the focus of the ART market in 2022. Portfolio/integrated risk products continue to face hard market conditions.

Market fatigue from poorly qualified and structured opportunities is apparent. ART deals supported by robust analytics and negotiated over realistic timeframes continue to fare better.

  • The parametric market, now established for many risks, continues to see an influx of investor capital and MGA-facilitated capacity and technology platforms. While this appears to duplicate capacity providers, it also disrupts established deals and pricing and drives innovation. Lenders are increasingly accepting parametric solutions, reducing historical barriers to utilization.
  • Structured solutions embedded in recent years are now expanding into other lines of business. Having been established to address a specific need, typically in primary property or casualty lines, clients are leveraging their investment in the mechanism to drive efficiencies into other lines of business.
  • As in property and casualty, fronting is now being aggressively deployed to address such risks as cyber, where insureds balance the prospect of no/limited risk transfer and contractual requirements.
  • Captive use has increased, though that has not necessarily translated into multiline stop loss or other ART approaches, as insureds simply retain risk.
  • Portfolio/integrated risk products are attracting less attention as they face the same pressures as traditional lines: rate increases, capacity reduction/withdrawal and team disruption. Underwriters have basically embedded risk financing features, moving these programs into their structured solutions books.

Structured solutions

  • Insureds with challenging risks or large risk appetites have benefited from deploying structured solutions.
  • In addition to increased use beyond property and casualty, these solutions are also attracting interest as reinsurance of captives.
  • Mature programs are expanding to absorb a wider set of risks.
  • Key advantages are:
    • Managing the cash flow impact of large losses while allowing insureds to stay within their risk tolerance and secure risk transfer capacity for remote loss scenarios
    • Replacing monoline layers where insurers are demanding rates-on-line (premium/limit) of 40%+
    • Creating a bridge between increased retentions and higher traditional market attachment points
    • Providing coverage for hard-to-insure risk classes for three to five years
    • Offering significant pre-loss financing that helps align the insured’s risk tolerance with that of the insurers

Parametric solutions

  • Natural catastrophe risks
    • Parametric hurricane and earthquake programs are the mainstay of ART activity in the Americas and other nat-cat-prone areas of the world. They are also being increasingly adopted by sovereign and public entities to aid in disaster recovery.
    • Insureds have a greater understanding of the limitations of traditional property policies and are realizing the broader potential ESG-linked uses of ART approaches.
    • Deployment has increased for hail, flood (water height) and wildfire, with new products emerging for tornadoes and network outage.
    • Typical use is to complement the property placement, in-filling deductibles, topping up sublimits or covering uninsured risks (such as non-damage business interruption risk).
    • To insureds exasperated by long, drawn-out claim adjustment processes following catastrophe events, the simple structure, use of independent data and quick settlement involved with parametric solutions are appealing.
    • While few see parametric solutions completely replacing 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.
    • This market continues to attract investor capital supporting new MGAs, and technology continues to drive product refinement. We are conscious, however, that these MGAs often access the capacity of established parametric markets. This could suggest that this market will see consolidation in the future.
  • 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 the natural catastrophe concentration in their portfolios and protect against loss resulting from warm northern hemisphere winters.
  • Pandemic solutions
    • Parametric pandemic solutions offer protection for lost revenue, lost gross profit and 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 restriction by a federal or state government in particular geographies.
    • These programs could help manage the cash-flow impact of a future wave of COVID-19 through a multiyear structured (pre/post loss funding) component (not risk transfer).
    • One leading reinsurer continues to “make the market” with others now publicly supporting this approach.
  • Emerging solutions and indexes
    • Broad non-damage business interruption solutions are becoming available using various economic and industry or risk indexes.
    • Multiperil policies are being written using generic industry indexes (REVPar, Footfall) that are correlated to multiple risks.
    • Insureds’ own production data is also being used where it is robust, has sufficient history and has gained insurer approval.
  • 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.
    • The use of blockchain deployment has been aired many times, as the characteristics of this sector are a good fit. That said, there is little movement in this direction, likely because these programs require a notable degree of upfront customization (especially for large insureds), and programs run quite efficiently today.

Fronting solutions

  • As capacity may be limited or simply not available for cyber insurance, many insureds are creating fronting programs of $5 million to $100+ million, leveraging their risk tolerance to retain the risk. This means that the money otherwise spent on insurance premiums can be redeployed into security improvement.
  • We expect this dynamic to appear in other challenging lines, especially where legislative change allows the assumption of risks not previously within scope.

Portfolio solutions

  • Capacity for multiyear portfolio solutions (or integrated risk programs) has diminished significantly, as ART units are forced to adopt the same underwriting restrictions imposed on their traditional monoline colleagues.
  • These markets increasingly focus on structured solutions or multiline stop-loss protection for captives or for a portfolio of deductibles/self-insured retentions.
  • 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.

Catastrophe bonds

  • Commentators highlight that investor interest and new sponsor participation saw record activity in 2021 and suggest a strong outlook for 2022, as well as continuing price improvement.
  • Adoption by non-insurance corporates remains low, suggesting most corporates do not face capacity restrictions or high premiums, factors that would promote investigation of capital market alternatives.

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Managing Director, Alternative Risk Transfer Solutions

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