Aon’s Joe Peiser on How Better Use of Data and Parametrics Can Help Carriers Bridge the Protection Gap

From the economic fallout of COVID-19, to the hard property market, to the volatility of macroeconomic factors, it has become increasingly difficult for insureds to adequately protect themselves from the risks posed by this landscape.

While traditional defensive strategies and risk management tools are still important, they are often no longer enough.

As a result, we are seeing a widening of the so-called protection gap, i.e., the difference between risk transfer needs and available capacity. This year alone, clean property accounts with modest catastrophe exposure have seen rate increases between 10 and 20%, and CAT-exposed accounts have seen price increases of at least 25%.

Some have seen increases in the triple digits.

More problematic for some has been the severe constriction of natural catastrophe coverage, leaving them vulnerable to losses that could damage their bottom lines much more than a premium increase. And natural catastrophe losses are on the rise, especially in severity — driven by the accumulation of values, often understated, in catastrophe-prone geographies.

This increase in catastrophe exposure is an example of the factors that are further hardening the property market. Industry experts continue to anticipate a hard market for the coming quarters, meaning less capacity, higher deductibles, and more need for expanded insurance solutions.

The insurance industry has responded to increased natural catastrophes and other risks with innovative offerings such as parametric and structured insurance that can complement traditional insurance programs. These are techniques that have been around for years and have been tested but had not been widely considered when traditional risk transfer insurance was widely available at attractive prices.

Today these techniques, and others, are being considered by many organizations. Moreover, with the availability of more sophisticated modeling and more robust data sets, risk financing can move from purchasing off-the-shelf commodities and toward being integrated with an organization’s strategic financial plan.

Data-Driven Approaches Help Better Understand Insurance Portfolio Costs

Companies have been increasingly looking for ways to manage risks more proactively. Data-driven approaches can help provide insight into insurance portfolio costs, allowing firms to better understand their entire risk profile and better understand the trade-offs between risk retention and risk transfer — regardless of the risk transfer technique.

In the property space, there has been a significant rise in natural catastrophes in recent years, with 2022’s Hurricane Ian further compounding the need for an innovative approach to risk assessment.

Within Aon, we’ve found tools like our business interruption (BI), contingent BI, and asset valuations allow firms to unlock data insights that enable clients to see a clearer picture of their full risk portrait. This not only provides them with the most comprehensive picture of their insurance needs but also actionable insights to quantify the total cost of risk and analyze their risk transfer options.

Aon’s Risk Financing Decision Platform (RFDP) is an example of the sophisticated modeling mentioned above, and another example of innovation that helps manage and possibly close the protection gap for clients.

The platform walks through three key steps to best support companies making impactful decisions on their risk transfer portfolio based on their risk profile and their risk tolerance. With this tool and the thoughtful problem-solving it provokes, clients can compare their current insurance portfolio with a myriad of other options in real-time, allowing them to measure insurance program benefits versus cost.

This tool also offers the flexibility to instantaneously mix and match different insurance structures, regardless of risk transfer technique and regardless of the risk taking market — insurance, reinsurance or capital markets.

Non-traditional Offerings Fill In Gaps for Weather-Related Risks

As weather events and other evolving risks become more commonplace, there are new gaps in coverage that are increasingly costly if left uninsured.

As an example, the National Hurricane Center noted Hurricane Ian was the most expensive hurricane in Florida’s history, with costs continuing to be reported six months after the storm. Today, Florida also faces historic flooding that will also take time to calculate the true costs and determine the depth of the flooding impact on the region.

All of these costs are further amplified considering that conventional insurance can take months or years for a claim to be adjusted and paid, especially in the case of a coverage or valuation dispute.

But, leveraging parametric insurance for weather scenarios like Florida’s recent flooding, organizations often receive risk transfer proceeds and thus liquidity that may be sorely needed in a matter of weeks.

Parametric solutions can be particularly helpful for these types of “gray swan” scenarios, or events that are known and possible to happen, but are assumed to be unlikely to occur.

Parametric insurance bridges the gaps in coverage for a variety of risks.

This offering is based on predetermined, measurable criteria — such as wind speed, temperature, or rainfall — that triggers payment when the conditions occur. This can allow companies to tailor their protection to their specific needs and provides protection even when traditional insurance may not be available or may fall short.

This type of non-traditional offering is particularly useful for weather-related risks such as those associated with extreme temperatures or storms.

By providing a form of coverage that is otherwise difficult to obtain, parametric insurance can help companies manage their operations and financial losses during these events more effectively.

Parametric insurance can also provide additional risk transfer proceeds if traditional coverages have been exhausted due to large losses or high deductibles.

In addition, parametric solutions enable companies to better understand and predict the cost of damage from weather events, allowing them to budget and plan more effectively for the future.

By leveraging real-time data from satellites, sensors, and other sources, insurers can provide accurate estimates of potential losses before they occur — giving companies invaluable insight into how much protection they need in order to safeguard themselves financially from these risks.

Innovative Insurance Products Are Here to Stay

While our current risk landscape is developing rapidly, the industry is evolving and innovating with just as much speed — bringing a crucial shift in mindset from defensive to offensive.

Several of the top innovations on the market today share a focus on flexibility, increased visibility into costs and coverage options, and an eye on the horizon of “gray swan” events. Together, these speak to this shift towards an offensive mindset, and provide quick, flexible solutions that speak to emerging risks posed by weather events and market conditions.

Either through comparing insurance portfolios in real-time through RFDP or solving for gaps in coverage via parametric solutions, companies can take advantage of tools today to provide more sustainable predictability and security for their businesses tomorrow. &