Insurance Marketplace Realities 2023 – Alternative risk transfer (ART)

Rate predictions: Alternative risk transfer (ART)

	Trend	Range
Structured programs		Flat
Parametric nat cat		-5% to +5%
Parametric weather index programs		Flat to +5% (+20% to +30% Asia)
Parametric pandemic programs		Flat
Portfolio programs		+25% to +40% over 3 years (7% – 12% annually)
Captive stop loss		Flat to +5%
Structured programs		Flat

Markets continue to navigate poorly qualified and structured opportunities. 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 increase market share through complementing existing placements, addressing increasing gaps in traditional coverage, or by providing novel capacity for ESG risks. 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; however, they do continue to perform favorably when compared to many monoline equivalent programs. Underwriters do continue to focus on their structured solutions books.

Parametric solutions

• Natural catastrophe risks
  • Parametric hurricane and earthquake programs are the mainstay of ART. However, capacity may become constrained due to potentially challenging 1/1 reinsurance renewals.
  • ART is increasingly deployed by sovereign and public entities to aid in disaster recovery and the protection of ecosystems, such as reefs and nature preserves.
  • Insureds aware of the limitations of traditional property policies are realizing the broader potential for ESG-linked uses of ART approaches.
  • Deployment has increased for hail, flood (water height) and wildfire, with new products emerging for tornadoes, pandemics and third-party cloud service provider outage.
  • Typical use continues to be as a complement to the property placement, in-filling deductibles, topping up sublimits or covering uninsured risks (such as non-damage business interruption risk).
  • The simple, easy-to-communicate structures and quick settlement are key drivers.
  • Captive participation is increasing often through quota share participation or fronting for parametric reinsurance. This is in support of a company's risk and ESG agenda.
  • 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 its 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 interruptions, 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.
    • Companies in the value chain, dependent on the volume of an underlying product can protect their revenue and profits by mirroring the yield or volumetric output of that underlying product.
  • In the renewable energy sector, these products support the revenue generation of wind and solar assets over five- 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.
• 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.

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 (several trends and exposures bear watching)

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.
• Expect this dynamic to appear in other challenging lines, especially where legislative change allows the assumption of risks not previously within scope.

Portfolio solutions

• Expiring programs have enjoyed stability in coverage and cost, having been protected from the hard market cycle. While these recalibrate to the current market environment, capacity has diminished for some insurers and lines of business following the traditional monoline market. That said, pricing continues in the main to be favorable when compared to monoline equivalent programs.

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 entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).

Contact

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Derrick Easton

Managing Director, Risk & Analytics (Alternative Risk Transfer Solutions)

email Email phone +1 212 915 7826

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