Aon’s Peiser: Demand rising for parametric cover for non-traditional risks

Demand for parametric cover is set to increase over 2024 as continued disruption in the traditional property market and widening protection gaps drive demand for liquidity, according to Aon’s latest market insights report.

Aon noted that market dynamics “played out decisively” in the fourth quarter of 2023, including rising interest rates, inflation, geopolitical instability, social unrest, humanitarian crises, and climate concerns.

The report added that challenging risk types and areas not targeted for insurer growth faced greater underwriting scrutiny, higher pricing and fewer options, while across all risks robust underwriting information and risk differentiation were key drivers of “superior” renewal outcomes.

Joe Peiser, CEO of Commercial Risk Solutions at Aon, commented: “Demand for parametric covers will continue to increase as organisations seek quick liquidity after a disruptive event, to address gaps in traditional insurance cover and to cover non-traditional risks (non-damage business interruption, contingent exposures, and many more).

“Resilience has helped organisations weather the challenges of 2023. In 2024, it will become a fundamental enabler of business strategies. Investing in resilience – including robust risk strategies – has never been more important.”

The complex risk landscape is particularly pronounced in the climate and nat cat space, with increased asset values in high hazard areas and a challenging traditional property insurance market fuelling the protection gap, which was estimated at 69 percent for 2023.

“This is money out of businesses’, public entities’ and consumers’ pockets to cover losses not transferred or efficiently managed,” said the report.

“Historically this protection gap was relegated to simply being a cost of doing business, but this is no longer the case; we now have an additional tool to attack this uninsured gap: parametric risk transfer.”

Property market transition

The report added that the property market continued to undergo a transition in the fourth quarter of 2023. Insurers remained focused on rating adequacy and nat cat capacity management, while also seeking profitable portfolio growth through targeted appetite and disciplined underwriting.

Rate increases continued, but this was generally moderate for most risks – although heavy industry and nat cat-exposed risks saw a more challenging pricing environment.

Aon noted that this mirrors disruption in the property market back in 2017, which saw issues around price and capacity availability. The year also marked a “significant inflection point” for the parametric market with the trifecta of Hurricanes Harvey, Irma and Maria following a relatively calm few years of hurricane activity.

In addition to bringing large, complex traditional insurance claims, the events also prompted an improvement in data sources to enable more granular and better structured parametric covers. They also led to broader education and awareness around the topic and an influx of capital providers into the space.

“This recipe of ingredients has led to consistent and sizable increases in pipeline and executed parametric transactions globally through today,” the report said.

Looking forward

The report concluded that, looking to 2024, the trends that manifested and shaped the past few years are likely to continue, and in some cases will become more pronounced.

“These are risks that contribute significantly to the protection gap, and they can be directly addressed via parametric mechanisms,” said Aon.

“Parametric solutions have now been tested in claims events around the world and are behaving as expected, which will lead to a much higher comfort level in going down the parametric road.

“Capacity will continue to flow into the space, both from established players increasing their capabilities and new players arriving on the scene. The result of this capital influx will be not only more competition on programs but also smarter and more effective structures for clients.”