The first half of 2024 saw the issuance of six parametric-triggered natural disaster bonds, representing around 7% of total issuance volume—up from 6.2% during the same period in 2023. Government entities are increasingly turning to the bond market for parametric reinsurance solutions.
This year also saw the first issuance of a parametric-triggered cyber catastrophe bond, signalling a shift in parametric risk transfer from traditional weather and seismic events to emerging risks. Sponsored by Hannover Re, the Cumulus Re (Series 2024-1) bond covers cloud outages.
Government reliance on parametric coverage was evident in July when Hurricane Beryl hit the Caribbean. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) made record payouts under parametric policies, including a $42 million payment to Grenada. The clarity of parametric triggers allowed CCRIF to process payments within 14 days of the event.
The transparent and predictable nature of parametric triggers appeals to both capacity providers and cedents, reducing uncertainty and potentially encouraging providers to cover additional risks and regions. This could offer investors greater diversification within their ILS portfolios.
AM Best said: “Parametric reinsurance complements indemnity-based covers rather than replacing them. It can help insurers fill gaps in reinsurance towers, particularly in challenging lower layers, or when indemnity coverage is impractical, as seen with government-backed parametric cat bonds. Sponsors using parametric coverage must be comfortable with basis risk and the possibility of over- or under-recoveries. However, advances in data and analytics may enhance sponsors’ understanding of how well a parametric trigger aligns with the actual losses they could incur.”
Parametric insurance works best when used alongside traditional indemnity-based reinsurance, rather than as a replacement. Parametric products can help insurers address gaps in their reinsurance strategies, especially in difficult-to-insure areas or where indemnity coverage is not practical.
