PwC execs: Parametric products have big role to play as insurers need to “double down on resiliency”

Insurers can lead the way on driving climate resilience, including rethinking traditional admitted products to include innovations such as parametric insurance, PwC executives have suggested at a Reuters conference.

Speaking at The Future of Insurance USA 2024 in Chicago, Veronika Torarp, principal, consulting services, insurance strategy at PwC US noted the big protection gap for natural catastrophe losses.

She cited Aon figures suggesting that in 2023, natural catastrophes globally resulted in $380bn in total losses and $118 billion in insured losses.

In 2022 PwC estimated that the global protection gap would be $1.9trn by 2025.

Torarp said that the frequency and severity of storms is increasing. “The issue isn't just that that's happening, but the insurance that's available to provide coverage is pulling back and therefore the gap is growing,” she said.

Insurers have pulled back from homeowners business in states such as California in response to increased natural catastrophe losses.

In a viewpoint article published this month, PwC suggested: “While this pullback may help short-term financial performance, it can’t continue unabated without undermining the entire purpose of insurance.”

Elaborating on this at the Reuters conference, Torarp said: “Carriers are taking those actions as we've seen in the news. But we believe there's also another way and we are seeing some active engagement around this. We think that the industry is going to have to really, really double down on resiliency going forward.”

Torarp continued: “That means building properties that are designed to last that are really prepared for the specific perils that you have in certain geographies in the US. So if you have a property in Texas versus a property in Florida, you're going to be exposed to different perils. So it is about making sure that your structures are prepared for those appropriately and that they are efficient.”

Buildings will need to be more efficient in terms of emission as well, she said.

In its viewpoint article, PwC had said the industry has the wherewithal to play a critical role by directing capital to where it can help mitigate risk.

But the company said that to do so effectively, insurers will need to understand their climate risk exposure on both sides of the balance sheet; create innovative new products to turn those risks into opportunities; invest in driving adoption of existing risk prevention solutions, such as proper home elevation in flood plains, steel roofing, roof tie-downs and flame-retardant solutions; and collaborate with a variety of stakeholders to chart a viable path to a more resilient future for industry and society at large.

Discussing the development of new solutions, Torarp said that whatever they are “they will come at a cost, and carriers can't bear the full cost”.

“So how can we distribute this in a way that insurance is available, risk transfer solutions are available, and consumers are incentivised to invest in resiliency? That's really what we have to solve for. We believe that parametric solutions is one of the answers and that we're going to see a lot more of these products going forward.”

Parametric market expected to triple in size by 2031

In its viewpoint article, PwC said, considering increasingly severe weather trends, carriers “may need to rethink traditional admitted insurance products to contemplate multi-year policies and other types of products such as parametric insurance.”

Providing an overview of how parametric products work at the Reuters event, Matthew Wolff, partner, functional and industry technologies at PwC, noted that the US is behind other regions in adopting the concept.

He said that some Asia Pacific carriers are now writing 40-50 percent of their commercial books on pure parametric products.

“We've not necessarily seen that here in the US. To some extent, there might be regulatory overhead related to that. It might be something innate within our market. But it is not new globally; it's more new in this market,” he said.

Wolff added: “It's a nascent but highly growing market; the current view is that, within about a decade, it's going to triple in size. So parametrics is a key growth driver for insurers.”

The executive cited estimates that the parametric insurance market will grow to $29bn by 2031 from $12bn in 2021.

PwC believes that insurers are starting to redefine the nature of coverage via the burgeoning parametric market.

It said that parametric policies — which determine whether a claims payment is warranted based on a pre-defined “trigger”, such as amount of rainfall in a given time — offer insureds a way to accept more risk for specific perils.

This means that coverage is available, generally at lower cost than traditional products, and that the claims process is faster and more efficient for all parties.

Wolff said that “the way to think about parametrics is that it's solving two things”.

“It's solving how you structure the policy itself, and then how you handle the claim,” he said.

Wolff conceded that basis risk is a challenge with parametrics. He also said that personal lines business remains particularly challenging for parametrics.

“In commercial insurance it is probably less of a concern because there are sophisticated buyers and risk managers that you're working with. Would you necessarily want to do a parametric with a fixed triggered payout on a personal lines homeowners policy? Probably not today, because there could be a risk of uninsuring or underinsuring them.

“But you could, for example, use parametrics to automatically pay for someone in Florida that has to move into a hotel for three days. That's a good example of claims handling that could be tied to a trigger,” he said.