Beyond the trigger – a parametric first approach

Parametric insurance has moved well beyond its origins as a niche catastrophe product. Re/insurers are increasingly using it to manage concentrated exposures, reduce earnings volatility and improve capital efficiency, while corporate buyers across sectors from renewable energy to hospitality are also adopting it.

Yet many placements are still structured as though parametric cover is an afterthought. Alejandro Solorzano, head of Latin America parametric at Augment Risk, argues that by the time brokers consider it, the deal has already been designed.

“Parametric is often the last resort solution to a problem that was already there,” he told Intelligent Insurer. “We’re taking the opposite approach. By putting parametric first, we’re focusing on the quality of every opportunity—delivering differentiated value to clients, achieving higher quote-to-bind conversion, and creating lasting enterprise value -

Ben Ledger, associate partner in global parametric at Augment Risk, added: “We’re seeing parametric protections becoming more mainstream across the entire market ecosystem,” he said, with buyers using it to supplement indemnity cover.

The market has also matured. “We’ve been in the parametric market for 15 years; it’s no longer a proof of concept,” Solorzano added. “It has evolved from a niche catastrophic tool into a strategic transfer to complement traditional reinsurance and capital markets.”

Augment Risk structures index-based deals and places them with capital providers, bridging traditional reinsurance with alternative capital, and is one of only a handful of brokers in the space.

“By putting parametric first, we’re focusing on the quality of every opportunity – delivering differentiated value to clients, achieving higher quote-to-bind conversion, and creating lasting enterprise value.”

Start with the balance sheet

For Solorzano, every conversation starts with the client’s balance sheet rather than the insurance product. “Success comes from understanding the client’s capital and financial structure first, then designing a trigger that provides liquidity when it’s needed,” he said. “I think that’s where our approach as a company is a big differentiator.”

He honed the approach in Latin America, where catastrophe exposure is high, insurance penetration low and underwriting data scarce.

Speed of payout is what truly differentiates parametric insurance from traditional indemnity coverage. Reflecting on Hurricane Maria in Puerto Rico, Alejandro Solorzano noted that many indemnity claims took three, four, or even five years to settle, with some remaining in litigation for much longer. By contrast, following Hurricane Melissa, the parametric market paid out hundreds of millions of dollars within days—providing clients with immediate liquidity when it mattered most.

For carriers, the attraction is balance-sheet protection. “They are not replacing traditional catastrophic structures. What they’re using is parametric to hedge exposure, reduce earnings volatility and improve capital efficiency,” Solorzano said.

That appeal has become even stronger in today’s softer market. With underwriting margins under pressure, Solorzano said carriers are increasingly looking for ways to hedge exposures, reduce earnings volatility and make more efficient use of capital.

“We need more diverse capital that’s willing to participate across a variety of deals.”

The basis risk question

The biggest objection remains basis risk — the possibility that the trigger does not perfectly match the underlying loss. Rather than avoiding that discussion, Ledger believes it should be quantified.

“If you can say that there’s X% chance the parametric structure won’t respond, and this is the price, and these are the associated portfolio efficiencies that you can bore out of this purchase, it’s up to the buyers to decide if that cost/benefit works for them,” he explained.

“People are willing to take risks as long as they know what that risk is, so articulating what basis risk is in the products is fundamental to get people comfortable with them,” Ledger said.

Access to better data also broadens what parametric can cover. “The introduction of satellites for assessors with live data is very exciting to us,” Ledger said, opening up perils once hard to structure, among them severe convective storm, flood and wildfire.

What needs to change

Despite growing demand, Ledger believes capacity remains one of the market’s biggest constraints.

“We need more diverse capital that’s willing to participate across a variety of deals,” he said. Too much business is concentrated among a small group of markets, creating bottlenecks and increasing concentrations of risk.

“There’s a lot of cannibalisation going on, and that cannibalisation ends up in a concentration of risk, because there's only a small number of players willing to take on that risk,” he said.

Solorzano believes brokers must shift their approach, diagnosing the client’s specific exposure before pitching a product. “We understand, here’s a client problem. We develop our view of risk that reflects the client exposure,” he said, with modelling vendors and data providers collaborating on each deal.  

Another risk is reputational. Ledger warned that rogue actors mis-selling to clients who do not understand the product could sour the market. “We find that people, once they buy parametric, they always come back, but if they have a bad experience with it, they’ll never come back,” he said.

Both executives believe the biggest change still needed is cultural rather than technical. Instead of treating parametric as a niche add-on once a programme has been designed, brokers should consider it from the outset.

When a deal is structured early and correctly, the client has certainty about what they can expect, they said.

Alejandro Solorzano is head of Latin America parametric at Augment Risk. Ben Ledger is associate partner, global parametric, at Augment Risk.

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