ART and parametric cover coming together in Australia

Hard insurance markets are boosting interest in both captives and parametric insurance in Australia and New Zealand, with the two converging going into 2022, according to Lockton.

In a webinar on alternative risk transfer trends on Thursday, Lockton Australia’s strategic risk advisor Cameron Sheild and Jessica Schade, its head captives and ART, outlined three key developments.

The first was the hard market promoting increasing interest in captive solutions. Considering the estimated 7,000 captives worldwide, Schade said that the drivers for considering captives had evolved over her career. Traditionally interest was restricted to companies facing high premiums or restricted coverage, normally due to high nat cat exposures.

“In recent years, a wide range of companies have been approaching me – companies with awesome risk and strong risk management principles and processes but feeling the pain of the market,” she explained. Often this was due to external factors outside their control, such as climate change.

“Five years ago, a company with a good risk profile would have a rather benign renewal, but in the last few years, that same company, with no change to their risk profile and no claims, has experienced increases in premiums that are sometimes quite sharp,” she explained. “What it’s doing for companies is moving insurance from another general administration expense in the P&L to a material expense.”

The change is helping drive interest in ART.

At the same time, parametric solutions were gaining popularity. Covers with triggers linked to crop quality or yields provided an alternative to single peril covers such as hail insurance, where capacity was volatile and payouts often coincided with high crop prices.

“Instead of the company having a policy that that wasn’t going to respond or respond when not needed, they now have one that’s not only more economical from a pricing perspective but is fit for purpose,” said Schade.

Going into 2022, the two trends were likely to increasingly come together, said Sheild. These would likely draw on the experience of existing examples in disaster risk financing, such as the Pacific Catastrophe Risk Insurance Company: A captive offering parametric cover to respond rapidly to nat cat events affecting the Pacific Island nations.

“These funds were often used to facilitate means to get essential supplies such as water, food and materials for shelter to outer islands or harder to reach areas,” explained Schade.

“This is an awesome example of how parametric products have been created to provide sustainable solutions and, in this case, actually protect vulnerable communities,” she said.