Airmic’s Graham: parametric products ‘perfect’ for emerging risks

Airmic’s newly installed CEO Julia Graham has suggested that innovative forms of risk transfer, in particular parametric insurance, are ideally suited to meet the challenge of rapidly growing emerging risks faced by business.

Speaking to Emerging Risks, Graham noted that parametric products, which are developing at pace at the moment are “perfect for emerging risks” and “exactly what you need in place”.

She noted that the parametric market is developing at pace, anticipating that a form of risk transfer which has historically been associated with weather-related products can now evolve to cover broader areas of risk.

“There are some quite sophisticated projects out there being developed and their success is based on the development of independent verifiable triggers,” she noted, highlighting the notable achievements made by some insurtechs in recent years, and lauding the developments of the Lloyd’s Lab in particular.

Key to the wider scope of parametric products has been the development of sophisticated underlying data sets which underpin the associated trigger mechanisms for particular products, she observed.

Graham’s support for the possibilities of parametric cover is one which is increasingly being voiced in the wider market.

For example, Aon’s Innovation and Solutions team, which specialises in parametric transactions, recently said it has seen a dramatic increase in the number of clients seeking to understand how they might supplement or replace their existing risk transfer programmes with parametric structures to potentially improve cashflow following a loss event.

The broker cited the example of a leading United States-based telecommunications company operating across multiple territories which recently replaced its entire traditional property indemnity programme with $300 million of hurricane coverage through a parametric solution that encompassed its operations in 29 different regions.

Aon said that parametric products complement its wider aim to offer the broadest range of capital solutions to clients, and can be particularly beneficial when capacity becomes constrained in the traditional re/insurance market.

Board preparedness

Looking more widely, Graham lamented that organisations are largely unprepared for the magnitude of potential emerging risks, despite the potential severity of their impact.

“The pandemic is an example of a high impact, low probability risk,” she said, adding that previous experiences of viruses and preparation planning for the impact of a potential pandemic had not been good enough: “we dithered and didn’t take it seriously.”

Graham also suggested that the corporate risk environment is one that is evolving fast, speaking of a “step change” taking place with regard to technology and evolving supply chains.

Boards need to ensure that they are properly prepared for the new landscape of risk, she said, with the right calibre of directors to respond adequately to the considerable array of challenges facing business. And she added that this risk landscape is not small: directors now face a range of risk responsibilities which they would not previously have had to deal with, including areas such as cyber and ESG – especially with new environmental reporting standards.

From 1 April 2019, for example, quoted companies must report on their global energy use and large businesses must disclose their UK annual energy use and greenhouse gas emissions. This is required by the Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018.

However, the government is considering making climate-related financial disclosures even more stringent, and is currently consulting on proposals to mandate climate-related financial disclosures by publicly quoted companies, large private companies and Limited Liability Partnerships.

These proposals build on the expectation set out in the government’s 2019 Green Finance Strategy, that all listed companies and large asset owners should disclose in line with the Task Force on Climate-related Financial Disclosure (TCFD) recommendations by 2022.

Risk transfer 

Graham also noted that of the challenges facing emerging risk cover is adequate risk transfer, noting that “a lot of products are still focused on services that you can rely on when things go wrong”.

While she said that many of these products are excellent, and the support services they provide enable access to valuable services, the real challenge for the market will be to take the products to the next level and offering a greater level of risk transfer- though she stressed that she was optimistic that we are currently on the cusp of achieving such a transition.

“The pandemic is an example of a high impact, low probability risk, we dithered and didn’t take it seriously.”

Julia Graham, Airmic