Parametric coverage for wildfire exposures is gaining traction amid a challenging environment for catastrophe-exposed property risks.
Improved data sources and satellite imagery are also one of the reasons for the wider uptake as better data translates into improved coverage triggering design and increased confidence among users, experts say.
“Wildfire is a clear use case for parametric because it’s easy to measure,” said Laurent Sabatié, co-founder and managing director of London-based Skyline Partners Ltd., an insurtech managing general agent specializing in parametric coverage.
With the traditional property insurance market tightening, wildfire capacity at risk of decline and retentions increasing, parametric coverage can help provide additional capacity.
“We̵7;re definitely seeing more requests for parametric wildfire coverage, primarily due to the loss of capacity in the claims market,” said Jacob Choi, New York-based global head of analytics in Marsh Specialty’s parametric solutions group.
“Capacity weaknesses” in the property catastrophe market are likely to continue for the “foreseeable future,” said Paul Schultz, Chicago-based CEO of Aon Securities, a unit of Aon PLC, and parametric coverage provides another option for such challenges.
Underwriters in the wildfire sector are “nice” and concerned about getting adequate compensation for the risks they take or grow weary of the volatility involved, prompting some to cut back on writing, Schultz said.
“We see parameters as one of our key strategies going forward,” especially with wildfires, which are among the so-called “secondary hazards” along with severe convective storms, he said.
As traditional insurers turn away from wildfire, some commercial policyholders seeking coverage are turning to the parametric market.
“We are fielding an increased number of wildfire claims, inevitably in part due to the tightening claims market, but also because the risk environment is more complex due to climate change. The decline of the current traditional market in California has reduced available capacity, with sharp spikes in retentions and deductibles imposed by commercial carriers,” said Sébastien Piguet, chief underwriting officer for Paris-based Descartes Underwriting SAS, a parametric insurance managing general agent.
Several major personal insurance companies, including State Farm Mutual Automobile Insurance Co. and Allstate Insurance Co., recently announced they will stop writing new commercial and personal property insurance in California due to increased wildfire risks, among other things.
There has been a “very significant” increase in interest in parametric coverage, and that “translates to getting more deals done,” said Cole Mayer, San Francisco-based head of parametrics for Aon PLC, who recently joined the brokerage from Swiss Re Corporate Solutions, part of Swiss Re Ltd.
There were 7.5 million acres burned in the U.S. by wildfire in 2022, close to the 10-year average of 7.3 million acres, according to a June report from Gallagher Re, the reinsurance brokerage unit of Arthur J. Gallagher & Co. The number of fires reported rose to 68,988 from 58,985 in 2021, according to the report.
While Alaska and parts of the Southwest saw an active wildfire season, the rest of the nation saw below-average wildfire activity. California, which in 2020 and 2021 had fires burning 4.4 million acres and 2.6 million acres, respectively, saw just 363,939 acres burned in 2022, report data showed.
Improved data in the form of higher-resolution imagery and better availability also helped in the development of parametric coverage by enabling better design of triggers and new indices, sources said, such as the percentage burned of an asset base in a forestry operation.
“New data from commercial and public sector satellites such as Sentinel 2 have significantly contributed to the growth of the market, offering high-resolution imagery efficiently,” said Kevin Dedieu, chief research and development officer for Descartes.
“The combination of improved data, more research and improved modeling is enabling the insurance industry to detect and monitor wildfires with increased accuracy in near real time,” said Mr. Choi.
Skyline’s Mr Sabatié said Landsat is widely used by the insurance industry. The Landsat program, jointly managed by NASA and the US Geological Survey, is a series of Earth-observing satellite missions, now consisting of the orbiting and active Landsat 8 and Landsat 9 satellites, according to the USGS.
“Ultimately, data and information about the losses is what informs the risk” and whether it can or should be covered, Sabatié said.
Sources said parametric coverage can be used on its own or in conjunction with traditional non-life insurance.
“Our customers can use parametric wildfire as a stand-alone policy or as an additional coverage to fill gaps in coverage, such as non-damage business interruption, or used as a deductible buydown,” said Marsh’s Mr. Choi. Typical parametric customers might include forestry and wineries, he added.
“Parametric can help expand the scope of coverage and tools for risks like wildfire that previously our customers could not adequately transfer,” said Mr. Mayer.