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Survey Report

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

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November 15, 2021

Structured and parametric solutions are a popular alternative to traditional insurance still facing hard market conditions.

Rate predictions

Rate predictions: Alternative risk transfer solutions (ART)
  Trend Range
Structured programs Flat
Parametric natural catastrophe weather programs Flat to +5%
Parametric pandemic programs Increase (Purple triangle pointing up) Flat to +5%
Portfolio programs Increase (Purple triangle pointing up) +10% to +25%

Key takeaways

Structured and parametric solutions are enjoying popularity as an alternative or adjunct to traditional insurance still facing hard market conditions — conditions that portfolio/integrated risk products cannot avoid.

Overall, ART deals (simple or innovative) supported by robust analytics and negotiated over realistic timeframes are faring better.

  • The parametric market is particularly competitive, with new market entrants and technology disrupting established deals and pricing. This is also driving innovation.
  • 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.

Structured solutions

  • Insureds with challenging risks or large risk appetites are increasingly looking to structured solutions.
  • While the greatest activity continues to be in the property and casualty sectors, we are seeing more participation across other lines. These solutions are also attracting interest as reinsurance of captives.
  • Structured solutions offer distinct advantages.
    • 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 increased in popularity again in 2021 due to the continuing hard property market and a greater understanding by insureds of the limitations of traditional property policies.
    • Deployment also increased for hail, flood (water height) and wildfire, with new products emerging for tornadoes and network outage.
    • These solutions complement property placements by in-filling deductibles, topping up sub-limits 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.
    • 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 new capacity, and technology continues to drive product refinement.
  • 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 action by a federal or state government in particular geographies.
    • These programs can 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 emerging, 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 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.

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

  • Alternative capital assets under management (AUM) have grown significantly in 2021 with strong net inflows. Willis Re Securities projected $94 billion of non-life insurance-linked securities (ILS) AUM at 6/30/2021, up from $90 billion at 12/31/2020. Life, accident, and health insurance and mortgage insurance ILS AUM excluded from the $94 billion figure have also grown significantly in 2021.
  • Net inflows and investor activity have gravitated to more liquid risk-remote products such as cat bonds; 2021 will likely prove to be a record year for cat bond issuance. This is in part because some believe that a more risk-remote approach with well-structured and liquid products insulates investors from modeling and reserving issues highlighted during the last few years in other products.
  • Lower cat bond spreads have attracted new sponsors but are also now starting to cause some modest portfolio repositioning toward less liquid strategies with higher risk-return profiles.
  • Environmental, social and governance (ESG) investing have been an increasing area of focus. ILS have arguably favorable ESG characteristics, though the specifics can prove challenging as ESG frameworks were initially developed with public debt and equity in mind.
  • A minority of investors continue to explore expanding coverage to new types of risks and clients. This trend should continue in 2022.

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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