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Survey Report

Insurance Marketplace Realities 2021 – Alternative risk transfer solutions (ART)

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November 18, 2020

Alternative risk transfer deals, whether simple, novel or innovative, supported by robust analytics and negotiated over realistic timeframes, fare better.

Rate predictions

Rate predictions: Alternative risk transfer solutions (ART)
  Trend Range
Structured programs Flat
Parametric programs Flat to +15%
Portfolio programs +10% to +20%%

Key takeaway

ART products are not immune to the same economic pressures faced by their traditional counterparts, and these pressures drive ART underwriters to act conservatively. When it comes to ART deals, this conservatism is manifested as a preference for simplicity over the cutting edge. That said, ART deals, whether 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 or gross profit, or an increase in expenses from a non-COVID-19 pandemic event. This program responds on a dual trigger basis requiring:
    • A World Health Organization notice (PHEIC or Pandemic) and
    • Either a breach of a pre-agreed level of cases or deaths in a particular geography(ies), or a civil authority action by a federal or state government in a particular geography(ies).
  • As an extension, this program can manage the cash-flow impact of a second wave of COVID-19 through a multiyear structured (pre/post loss funding) component (not risk transfer).
  • Capacity and pricing have remained steady.

Structured solutions

  • The focus of activity continues to be in the property and casualty lines of business and where the traditional market is charging rates-on-line (premium/limit) of 40% or more for a layer of insurance.
  • 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 the market 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.
    • 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 exhaust 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 help diversify a) their natural catastrophe aggregation, and b) their warm northern hemisphere winter concentrations driven by their energy clients.
  • 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 multiyear portfolio solutions (or integrated risk programs) is diminishing in the current market as ART units are forced to adopt the same underwriting restrictions imposed on their traditional monoline colleagues.
  • These markets have increasingly focused 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

  • While traction among corporate clients remains low, capacity in the catastrophe bond market remains available, with deals renewing at or near expiring capacity. Spreads have remained elevated: up 10 - 15% from pre-COVID-19 levels.
  • Trapped collateral created by natural catastrophe losses continues to create uncertainty for investors. This could create frustration and lead to more redemptions as well as contraction in the retro market. A contracting retro market could render some ILS funds unable to renew their lines in full at the January 1 renewals.

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.

Contact

Derrick Easton
Managing Director, Alternative Risk Transfer Solutions

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