Why Parametric Solutions Should Be Part of Your Next Renewal Conversation
Why Parametric Solutions Should Be Part of Your Next Renewal Conversation
October 6, 2023 8 mins
Why Parametric Solutions Should Be Part of Your Next Renewal Conversation
With continued market volatility, finding adequate coverage for growing protection gaps via traditional insurance alone is challenging. Parametric solutions can help businesses build resiliency against catastrophe-prone exposures and more.
Key Takeaways
Risk managers are increasingly deploying ART solutions such as parametric to fill protection gaps and take better control of their risks.
Parametric insurance has become an important strategic tool to mitigate natural catastrophes and other risks in a hard property market.
Parametric products are independent, fast and flexible event-based versus loss-based solutions that enable access to coverage under any market condition.
As capacity shrinks and rates increase in the traditional property insurance market, risk managers are creatively rethinking their risk resilience strategies.
There are a variety of alternative risk transfer (ART) solutions that risk buyers are using to address growing protection gaps, while also adding flexibility into their renewal decisions.
Parametric insurance has emerged as a compelling and unique option, especially in catastrophe-prone areas. It provides a different way to think about mitigating risk, especially if conventional products are restricted, unavailable or not meeting an organization's needs.
Building A Resilient Business with Parametric Solutions
Parametric coverage is triggered when predefined parameter thresholds measured and reported by a third party are met. As a result, what was once considered uninsurable is now insurable. Claims payments are also made within weeks, freeing up capital when a business most needs it.
“Parametric insurance has a two-pronged value proposition as compared to traditional insurance,” says Michael Gruetzmacher, Aon’s head of Alternative Risk Transfer and Innovation.
“First, it transforms how insurance works through an alternative claims process that results in faster payouts, making it a liquidity instrument. Second, it transforms coverage to a ‘brute-force’ approach that covers any economic loss from a trigger event vs. the ‘surgical’ approach of traditional insurance, which typically results in protection gaps.”
In catastrophe-prone areas where market capacity is limited and rates continue to rise, for example, parametric insurance has become an important strategic tool. It allows risk managers to take better control of their risks with an “if-then” model that complements and supplements existing indemnity programs.
“One of the advantages of parametric insurance is that it allows carriers to price things directly,” says Peter Lacovara, managing director of Aon’s Alternative Risk Transfer and Innovation.
“The same carriers might be more willing to deploy parametric limits over conventional ones because they have a very clear understanding of how the policy is priced and how they could potentially lose money,” he adds. “With conventional indemnity, there are all kinds of nuances involved.”
Three Reasons to Implement a Pro-Parametric Renewal Strategy
1. Speed of Payment: Because the index value from a third-party trigger can be verified quickly, a claim can be paid within days after an event. This allows for fast post-event liquidity to deal with the immediate aftermath of a disruptive event.
2. Broadness of Cover: Payment can be used for any resulting financial loss from an event, with no deductible applied. Further expenses and losses that are typically excluded under a traditional indemnity policy can be addressed.
3. Flexibility in Design: Parametric can be customized to solve for specific coverage issues that may be difficult for traditional insurance. This could include supply chain, non-damage business interruption, loss of attraction, loss of ingress/egress and sub-limited or excluded coverages.
“By working with qualified industry leaders and third-party data providers on risk events, businesses can quantify their exposure by location and create customized parametric triggers to accelerate recovery from hard-to-estimate economic losses,” says Kirstin McMullan, Aon’s Principal Consultant for Natural Catastrophe in Australia.
Managing Future Risk With Parametric Solutions
Parametric products are independent, fast and flexible solutions that enable businesses to access coverage under any market condition. They can be leveraged with traditional methods as an additional avenue of recourse for typically uninsured events, while also serving as a supplementary protection gap filler for navigating the volatility of future markets.
Many exogenous, non-damage business interruption events, such as COVID-19, are not readily addressed by existing insurance solutions. As the industry collectively works to enhance resiliency for these kinds of events and other emerging risks, parametric insurance can be a key tool to match capital to risk and make better risk decisions.
Parametric Insurance Addresses Many Diverse Business Needs
Hedges traditional insurance both in time (settles quickly while traditional is being adjusted) and in coverage (broad coverage fills in the gaps within a traditional insurance policy).
Can provide supplemental capacity when programs are difficult to fill.
Difficult-to-Insure or Uninsurable Risk
Parametric can cover risks that the traditional market struggles to address.
Some examples include transmission and distribution lines, solar assets, hazardous or exposed occupancies, older structures, etc.
Non-Damage Business Interruption
Due to the broad definition of loss (wherein physical damage at the client’s assets is not required), parametric covers can address financial loss that the client incurs as a result of wide area damage or infrastructure disruption.
This would include various types of contingent business interruption loss resulting from damage to key suppliers or customers.
New Exposures
Parametric insurance can cover exposures not previously considered insurable under any traditional policy.
A few examples include employee assistance following a major event and public entity’s loss of tax revenue.
Parametric insurance can be seen as the catalyst for the future. It unlocks new solutions and access to capital through the straightforward nature of its underwriting process and the simplicity of the product itself.
Michael Gruetzmacher
Head of Alternative Risk Transfer and Innovation, North America
Aon's Thought Leaders
Michael Gruetzmacher
Head of Alternative Risk Transfer and Innovation, North America
Peter Lacovara
Managing Director, Alternative Risk Transfer and Innovation, North America
Kirstin McMullan
Principal Consultant, Natural Catastrophe, Australia
Tracy Riddell
Head, Placement, Property & Casualty, Australia
Sam Ketley
Head, Enterprise Risk Solutions, New Zealand
General Disclaimer
This document is not intended to address any specific situation or to provide legal, regulatory, financial, or other advice. While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.
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Public Sector respondents to our Global Risk Management Survey (GRMS) ranked cyber attack or data breach and damage to brand or reputation as their two most critical risks.
Retail and Consumer Goods respondents to our Global Risk Management Survey (GRMS) ranked cyber attack or data breach and supply chain or distribution failure as their two most critical risks.
Sports and Entertainment industry respondents to our Global Risk Management Survey (GRMS) ranked damage to brand or reputation and business interruption as their two most critical risks.
Technology, Media and Communications industry respondents to our Global Risk Management Survey (GRMS) ranked cyber attack or data breach and failure to attract or retain top talent as their two most critical risks.
Transportation and logistics industry respondents to our Global Risk Management Survey (GRMS) ranked cyber attack or data breach and economic slowdown or slow recovery as their two most critical risks.
Asia Pacific respondents to our Global Risk Management Survey (GRMS) ranked cyber attack or data breach as the number one current and future risk for the region.
European respondents to our Global Risk Management Survey (GRMS) ranked cyber attack or data breach as the number one current and future risk for the region.
North American respondents to our Global Risk Management Survey (GRMS) ranked cyber attack or data breach as the number one current and future risk for the region.
Middle East and Africa respondents to our Global Risk Management Survey (GRMS) ranked economic slowdown or slow recovery as the number one current and future risk for the region.
Understanding the physical and transition risks will be key to successfully managing climate risk and developing a climate resilient luxury goods business.
Generative Artificial Intelligence (AI) – a type of artificial intelligence that has the ability to create material such as images, music or text – is already a proven disruptor and its adoption is growing at an explosive rate.
Medical costs continue to rise around the world. Aon’s Global Medical Trend Rate report provides insight into what conditions are driving these increases.
Insurance leaders can confidently future-proof their business strategy and avoid misalignment, by engaging the right groups of people to define and deliver their roadmap for success.
Commodity Price Risk or Scarcity of Materials is the seventh biggest risk facing organizations globally today and is predicted to rise to the third most critical risk by 2026, according to our survey.
Economic Slowdown or Slow Recovery is the third biggest risk facing organizations globally today, and is predicted to be the second most critical risk by 2026, according to our survey.
Failure to Attract or Retain Top Talent is the fourth biggest risk facing organizations globally, and is predicted to remain the fourth most critical risk by 2026, according to our survey.
Regulatory or Legislative Changes are the fifth biggest risk facing organizations globally today, and are predicted remain the fifth most critical risk by 2026, according to our survey.
Supply Chain or Distribution Failure is the sixth biggest risk facing organizations globally today, and is predicted to fall to the thirteenth most critical by 2026, according to our survey.
Business Interruption is the second biggest risk facing organizations today and is predicted to fall to the sixth most critical by 2026, according to our survey.
Cyber Attack or Data Breach is the number one risk facing organizations globally and is predicted to remain in this position by 2026, according to our survey.
Damage to Brand or Reputation is the eighth biggest risk facing organizations globally today and is predicted to fall to rank twenty one by 2026, according to our survey.
Failure to Innovate or Meet Customer Needs is the ninth biggest risk facing organizations globally today and is predicted remain in that position by 2026, according to our survey.
Increasing Competition is the tenth biggest risk facing organizations globally today, and is predicted to rise to the seventh-most critical risk by 2026, according to our survey.
Gene and cell therapies represent breakthrough advances in medicine, but they also have significant costs and potential risks for patients, employers, insurers, governments and manufacturers.
A global survey of medical trend expectations highlights the health conditions affecting employees and impacting costs, how employees are using their medical plans, areas where they need better coverage and where employers can build on these insights.
In the wake of record-breaking high global temperatures in 2023, the rising frequency of extreme heat due to climate change creates an urgency for the risk industry to analyze climate trends for better risk mitigation.
Life sciences companies lag other industries in addressing the physical and mental health of employees and getting them future-skills ready. Here are actions to address these gaps.
A drug class known as GLP-1 receptor agonists or simply “GLP-1s” (e.g., Novo Nordisk’s Ozempic) has been used for several years to help control type 2 diabetes.
Technology, media and communications businesses need to understand how climate change threatens their operational resilience. Parametric insurance is becoming an important part of the solution.
Within the fast-moving Technology, Media and Communications sector, workforce resilience is critical to operational resilience. The journey there involves understanding the key components of workforce resilience, how they can be measured and what initiatives promote greater resilience.
New pay transparency laws are forcing employers to develop a pay disclosure strategy and make decisions like whether to voluntarily disclose salaries where it’s not legally required.
The strategic use of credit solutions (credit insurance, political risk insurance and surety) can enhance liquidity, improve transaction returns, facilitate capital-efficient deal closures, and support long-term value creation.
The SEC published nine new Compliance and Disclosure Interpretations (C&DIs) covering the pay versus performance rule. The C&DIs focus on when awards are considered vested and the valuation of equity awards in specific circumstances.
Burnout and languishing threaten individual and organizational productivity and business outcomes. A company’s employee wellbeing strategy can help prevent them by mitigating microstress.
The IAC recommends the SEC mandate prescriptive requirements in several key areas of human capital management disclosures to provide investors with relevant, timely and comparable data to adequately contextualize a company’s workforce value.
As cyber attacks become more sophisticated, banks can shore up their cyber-security resilience efforts by building a partnership between business leaders and cyber technologists.
As cyber threats continue to increase it is vital that businesses build ongoing operational cyber resilience to help assess, mitigate and transfer risk, and recover should an attack occur.
Addressing the retirement pay gap issue between men and women starts with first acknowledging it exists. Then companies can conduct further analysis and adjust their benefit plans accordingly.
The first 10 days after a cyber-attack can be the most damaging. Having a cyber incident response plan in place and ready to deploy can help companies assess threats and develop controls.
Pricing pitfalls are more common than you think, whether it's working with incomplete data or key man risk – but with the right pricing process, many of these issues can be mitigated. Read our article to learn about the most common pricing errors, and what insurers can do about it.
In today's increasingly complex insurance landscape, an inadequate pricing system can not only impact insurers' view of risk, but also prevent them from making the right decisions at the right time. Read our article on why it's essential to get pricing right.
Climate modeling has been around for decades but mainly used by academic and government scientists. Led by the risk industry, the private sector is adapting these models to broadly assess the physical impacts of climate change.
With the continued threat of rising temperatures, companies should focus on building climate and weather-related impacts into their overall workforce resilience plans.
SECURE 2.0 is changing retirement planning for businesses and employees. Strategic decisions will be critical in building sustainable retirement plans.
Sales teams have unique compensation programs that are critical for aligning selling behavior and outcomes to business goals. Here are five considerations to prepare plans for the year ahead.
As cyber attacks evolve, insurers are scrutinizing how organizations understand and address potential cyber security exposures. Achieving a baseline of security standards is crucial to securing coverage, demonstrating a strong resiliency program is key to achieving optimal terms and conditions.
In a move designed to close the gender pay gap, the European Commission is increasing pay transparency across member states. Prepare your firm now for potential implications and opportunities.
Climate change or exposure growth? By understanding the drivers of increased severe convective storm loss volatility, reinsurers can better prepare for January 1 renewals.
Innovation in data, analytics and risk transfer solutions enables Aon to help clients accelerate their investments in decarbonization and climate resiliency and support the transition to a lower-carbon economy.
In a volatile climate, institutional investors are turning to outsourced chief investment officers to conquer administrative, regulatory and market challenges.
Many risk buyers remain challenged to find adequate coverage to address a growing protection gap, especially for their cat-prone exposures and other risks. Parametric is an alternative solution that has grown in utilization to insure against a variety of perils in any market conditions.
Cyber security is a growing business concern, but many companies still need to improve their cyber resilience in key areas. Aon’s 2023 Cyber Resilience Report explores how global industries are protecting themselves against cyber threats.
A strong people strategy and robust change management and communication approach will drive better cultural alignment during M&A deals — ultimately increasing the chance for success.
In a rapidly changing IP landscape, companies should consider assessing their risk exposures and management strategies to help protect some of their most valuable assets.
As cyber attacks increase and become more costly, cyber security coordination across business units has become more important than ever. By bringing the chief information security officer (CISO) and chief risk officer (CRO) together, companies can take a proactive approach to minimizing cyber risks.
Business leaders are facing a growing number of complex and interconnected risks, resulting in decision fatigue for many executives. Aon CEO Greg Case explains how leaders can take a proactive approach to difficult choices while investing in talent development and wellbeing.
Work-from-home and hybrid-work models can significantly influence the commercial real estate market, which in turn has a major influence on the financial health of a city.
Employees often face cyber attacks while they’re on travel for business, putting sensitive company data, trade secrets and intellectual property at risk.
Risk managers are rethinking their risk resilience by turning to parametric insurance, an “if-then” model designed to complement and supplement a traditional indemnity program and better match capital to the broad nature of risk caused by natural disasters.
To maintain a competitive edge in today’s complex global economy, people leaders must expand their data strategies and get organized to keep up-to-date and make better risk decisions.
The return of El Niño is creating challenges for the global supply chain, including risks for transportation and logistics. As disruptive weather and climate events persist, vulnerable industries will need to rethink their supply chain strategies to maintain resilience.
An alarming number of insured Americans still can’t afford healthcare treatment, but there are approaches employers can take to reduce costs and improve outcomes for employees and their families.
Record high Atlantic water temperatures are leading forecasters to predict an above-average hurricane season. Learn how to build business resilience to protect hurricane-prone properties.
AI is creating new possibilities in life sciences, especially in R&D, training and marketing. But, as the industry adapts to AI, it also faces risks and challenges.
Unexpected global changes have shaken supply chains, exposing the fragility of a complex system. While some businesses search for stability, others are harnessing the power of improved data, analytics and AI to strengthen their resilience and opportunities for growth.
In a tight labor market, people leaders are relying more on talent assessments for pre- and post-hire candidates. The resulting data and insights lead to more informed hiring and retention decisions.
New standards from the IFRS Foundation’s International Sustainability Standards Board (ISSB) add expectations for companies to disclose more stringent climate risk and oversight information, as well as greenhouse gas emissions data.
Artificial intelligence could help banks make better use of customer data and workforce capabilities, in addition to reducing financial fraud. However, financial institutions must be mindful of the risks of AI as well.
As the risk landscape expands, every TMC business should consider developing a robust framework for operational resilience. A three-phase strategy provides a rational approach to building a framework to help understand and manage key risk concerns and minimize business disruptions.
Companies can enhance their DE&I efforts — and gain better returns — by creating a culture that enables their employees to feel a sense of belonging at work.
Wellbeing strategy, once seen as a luxury, is now a vital part of a company’s overall strategy. Integrating wellbeing into other areas of a company is the next step forward.
Protecting and sustaining businesses in food, agribusiness and beverage, financial institutions, life sciences and renewables require a resilient workforce. Organizations must consider the skills, capabilities, agility and wellbeing of their people to achieve a productive and healthy workforce.
Pressure to reduce costs in response to a challenging economic environment highlights the pivotal role data and analytics can play in optimizing business investment in talent and future growth.
The current economic climate has created headwinds for mergers and acquisitions, causing shifts in financing. Using trade credit insurance can help unlock value and reduce volatility.
M&A deals are among the most challenging events a business can navigate. Effective organization design and talent planning are critical to ensure a smooth transition.
Return on investment is one of the biggest considerations in implementing employee benefits. This is more pertinent as global economic volatility forces companies to balance costs with expectations.
New regulations in the U.S. aim to peel back the curtain on how healthcare prices are set. This will drive employers to use data to make better decisions about the best coverage for their people.
Business leaders should take a close look at their reward programs during a merger or takeover to help retain talent and ensure a cohesive pay strategy.
As healthcare organizations digitalize their business and face global workforce shortages, our analysis finds they are rapidly recruiting new talent with specific data skillsets.
The renewable energy industry is facing unique headwinds, but there are opportunities to accelerate the role of European onshore and offshore wind power.
For many companies, recognizing and addressing supply chain risk can seem like an impossible task. But a unified approach can chart a clearer course of action.
Employers around the world are seeking ways to prioritize DE&I in their benefits programs and workplace resources, according to Aon’s 2022 Global Diversity, Equity and Inclusion Survey.
Recent events have helped unite security and technology professionals in the fight to thwart cyber criminals. Here's why HR leaders also play a major role.
Industry leaders in life sciences, financial institutions, technology, media and communications and food, agribusiness and beverage face a surge in cyber threats and data breaches.
The impact of climate change on businesses, insurers, and communities can provide insight on how to mitigate the risks associated with extreme weather events.
Following a tumultuous two weeks in the banking sector and subsequent volatility to global banking markets, depositors and affected third parties are having to rapidly assess, and respond to, a range of risk management, liquidity and human capital challenges.
IP litigation risk continues to evolve year-over-year, creating complex challenges for SMEs. You can help stay protected and prepared by focusing on these mitigation techniques.
HR leaders are at the center of activating ESG initiatives in the workplace. This has a critical impact on protecting a firm’s greatest asset — its people.
Facing natural disasters, advanced weather and catastrophe modeling can help companies prepare — often resulting in quicker claims processing and response.
Today’s global tax environment grows ever more complex. Tax insurance is a potential solution to help provide certainty and protect value in M&A transactions.
NFTs are digital ownership records that are verified using blockchain technology and can be tied to works of art, collectibles and other intellectual property.
Data brokers are companies that collect and sell personally identifiable information to third parties. This industry has become a multibillion-dollar industry, but it also presents risks to individuals and businesses whose personal information may be used for nefarious purposes.
Because Russia and Ukraine are responsible for a significant share of the world's wheat, barley, corn and oil seed, the conflict will have significant consequences on global food supply and prices.
In this interview, Greg Case, the CEO of Aon, discusses the challenges that businesses are facing due to the pandemic, cyber risks, and the impacts of climate change.
A record number of workers are quitting jobs and changing companies — or thinking about it. How can employers retain talent in today’s competitive market?
Artificial intelligence is changing the way businesses operate. As its use becomes more widespread, leaders need to understand how this technology works and what its future role may be.
