Two parametric risk transfer deals are set to pay out to Jamaica following Hurricane Melissa, according to Willis Re.
The hurricane triggered the country’s US$150 million World Bank sovereign bond, which did not pay out after Hurricane Beryl last year. Meanwhile, the Caribbean Catastrophe Risk Insurance Facility (CCRIF), described as the largest parametric insurance program globally, will pay US$70.8 million to Jamaica, marking its largest claim to date and possibly with more payments to follow.
Willis Re noted that the structure of parametric coverage allowed Jamaica’s payments to be confirmed within days of the storm. The insured party has certainty and will soon receive funds, while payments under conventional catastrophe reinsurance policies related to Melissa may take months to finalize.
Parametric reinsurance, which pays a fixed amount when a specific event occurs, is not an indemnity product. Instead, it is triggered by a named-peril event of a stated intensity, not by the aggregate insured loss.
The rapid payout feature of parametric contracts provides a swift liquidity injection as claims arise, eliminating the issue of trapped capital for investors. Willis Re observed that this speed contrasts with the lengthy settlement process often seen with traditional catastrophe reinsurance.
Some chief financial officers have viewed parametric reinsurance as a discretionary purchase, while others have adopted it as a substitute for lost layers of conventional reinsurance that are no longer available at economic terms.
The growing use of parametric insurance to address climate and systemic risks is being seen across the industry. Gallagher Re has previously reported that these models, which rely on real-time event data and predefined triggers, are helping to close the protection gap between total economic losses from disasters and the portion that is insured.
This shift is reflected in the rapid expansion of the parametric insurance sector itself. Gallagher Re estimates the global market was valued at US$11.7 billion in 2021 and projects it will reach US$29.3 billion by 2031, as more private and public entities seek risk transfer mechanisms that can respond quickly to climate events, market shocks, and emerging perils.
To broaden the appeal of parametric products, several reinsurance markets now offer contracts triggered by both the event and its modeled impact on the reinsured portfolio.
According to Willis Re, these modeled triggers are possible because underwriters price parametric reinsurance based on extensive risk modeling, which aligns the price with the true risk cost. This technical pricing approach is less influenced by loss history or market cycles, although Willis Re suggests there is evidence that prices may already be easing as the market softens.
For weather-related perils, underwriters factor in climate change impacts, and for all perils, pricing is generally agnostic to factors like loss record and internal budgets.
As conventional underwriters begin to cover perils such as wildfire, flood, and severe convective storms at lower prices, Willis Re expects the popularity of modeled triggers to decline, except where reinsurance supply remains constrained.
Other structures have been developed to match the realities of different perils. For example, payouts for wildfire may be determined by satellite imagery analysis of burnt areas within reinsured zones, with broader areas subject to lower limits for smoke damage.
All major reinsurance markets now offer parametric products, and several managing general agents have entered the space. Willis Re highlights the ongoing evolution and flexibility of these products, noting that each iteration brings improvements, though neither parametric nor conventional reinsurance is without flaws.
Parametric reinsurance can be tailored to respond to lower-frequency events by adjusting the triggers. As seen in Jamaica’s recent experience, the instrument responded as designed after Hurricane Melissa, following controversy over the non-payment after Beryl.
Willis Re suggests that the event may encourage more nations to consider parametric risk transfer, potentially narrowing the global insurance gap. The firm also points out that parametric solutions are becoming an important tool for managing peak-peril risks in reinsurance portfolios.
