Parametrics can result is some odd-looking payouts and are susceptible to gaming by those offering the product. More after the jump.
From The Edge, Singapore, June 30:
One of the most successful hedge fund strategies of recent years — insurance-linked securities — is latching on to an old idea whose popularity is suddenly soaring.
Parametric insurance, where policyholders get quick payouts if weather-related metrics are met, used to be the preserve of small businesses and farmers in developing countries. Now, it’s a rapidly growing market luring large corporations across the rich world.
Sebastien Piguet, co-founder and chief insurance officer at Descartes Underwriting, says parametric models are filling a gap left by other types of insurance policies. That’s as climate change and more frequent extreme weather events challenge standard coverage models.
“It’s much more challenging to find capacity for this kind of coverage with traditional insurance,” he said.
Companies using parametrics now include French pharmaceutical firm Sanofi, telecommunications company Liberty Latin America and renewable energy investor Greenbacker Capital Management. The market for such products is estimated to almost double to US$34 billion ($43.29 billion) in the decade through 2033.
It’s a shift that’s caught the attention of ILS investment managers. Insurance-linked securities, which a Preqin ranking listed as the best-performing hedge fund strategy of 2023, have long focused on catastrophe bonds.
Typically issued by insurers and reinsurers, investors in the bonds make money if predefined triggers like wind speed or insured losses aren’t met, and lose money if they are.
In recent years, that model has generated market-beating returns.
Investment funds based on parametric insurance have the potential to beat cat bond returns, according to Rhodri Morris, a portfolio manager at Twelve Securis. The Zurich-based US$8.6 billion alternative investment manager, which specialises in catastrophe bonds, launched the Lumyna-Twelve Capital Parametric ILS Fund together with Lumyna Investments in February.
“We aim to return a couple of percentage points above the cat bond market,” Morris said in an interview.
The fund, which is the first of its kind, has so far attracted about EUR85 million ($127 million) of capital. Morris says the expectation is that it will draw as much as EUR200 million next year.
A key attraction for investors is they can avoid so-called trapped capital, according to Morris. Investors in cat bonds sometimes wait for months — or even years — before loss rates are assessed and payouts settled. Investors in a parametric fund will generally know within days whether an underlying insurance contract has paid out or not.
The Lumyna-Twelve parametric fund has drawn “genuine interest” from investors, Morris said. But they’ve also had questions, and there’s a number of important factors to consider, he said.
“Investors need to understand that you’re giving up liquidity in some part of the portfolio,” Morris said. “But the benefits you’re getting are higher returns and the lack of trapping.”....
....MUCH MORE
Some posts on parametric insurance:
April 2020
"World Bank pandemic cat bonds & swaps not triggered for payout yet"
I'll recycle the introduction we used a month ago:
"Coronavirus: The World Bank should care that the public does not understand its pandemic bonds"
Although the WHO declaration of "PANDEMIC" was not required for payout you'd think the money would have started flowing right? I mean both of the important triggers tripped, secondary markets have already marked the riskiest tranche down to zip but none of the relatively paltry $320 million has started moving.
As we said during the last Ebola pandemic, these things appear to be designed and structured to not pay out.
Here with some defense is EuroMoney:...
...The 3-year notes mature in July 2020.
For our outro, some more recycling, this time from February [2020]:
World Bank Pandemic Catastrophe Bond Under Pressure As Coronavirus Spreads
I have become convinced these things were designed to NOT pay.
As noted previously:
Reinsurance: "No coronavirus price response from World Bank’s pandemic cat bond yet"July 2020We saw with Ebola that, even after both triggers—1) a minimum 250 victims and 2) the crossing of an international border—were reached, the World Bank's Pandemic Emergency Facility was very reluctant to declare the payout, eliciting some snark from yours truly:"And if the cross-border contagion is reported on a day ending in a 'Y' all contracts will be null-and-void and coverage denied."
Re/Insurance: Chubb Proposes Giant $1.25 Trillion Pandemic Facility
Two quick points:
1) Insuring against pandemics is frightfully complicated meaning lots of opportunity to structure product to ones advantage.
2) Be wary of your friendly neighborhood re/insurance salesman, even if he is as down-home and folksy as that fellow from Omaha.
Much less the verzekering/herverzekering or London or München boys and girls....
November 2021
"COP26: Munich Re calls out global failure to hit $100bn climate finance goal"
Huh.
....As noted in the intro to October 11's Cat Bonds/Reinsurance: "City of Zurich pension to double insurance-linked securities allocation":
The next time Munich Re starts moaning about climate change and how we're all going to die, or at minimum go broke, just remember reinsurance/cat bonds are a for-profit business and that some folks a couple hundred miles southwest of München, who might have access to some very sharp minds in the reinsurance/cat bond business, seem to think this is a profitable place to put some longer term money.Ditto for Covéa, they seem to think they can make a go of it, come hell or high water.
(a little reinsurance/cat bond wordplay)
October 2023
"Weather derivative market activity soars on belief extremes to increase: Report"
Action, baby, action!January 2025
We will be looking for the first reports of the proverbial "dentist from Peoria" (Los Angeles Times, Jan. 21, 1989) stepping up to the betting window....
"Why catastrophe bonds are failing to cover disaster damage"
It is a financial contract, read the fine print.
From The Economist...
***
As an old insurance bigwig (not Mr. B) once said to me, "These things are for writing, not buying
***
Somewhat related (reaching for returns), June 2025:
Ummmmm—Tokenized Real World Assets: Reinsurance Products Targeting 20% And 42% Returns
Grandmother always said "If you are getting more than the risk-free rate of return you are taking on risk somewhere." She was really emphatic about that....
