Aon forecasts parametric capital influx from re/insurers and ILS funds in 2024

Broking giant Aon has said today that it anticipates an “influx” of capital to the parametric risk transfer space in 2024, from traditional insurance, reinsurance and ILS fund sources.

Overall, Aon forecasts that the demand for parametric solutions will continue to increase, with a focus on both protection of assets where traditional insurance gaps exist, to provide liquidity after major events strike and to cover business interruption and intangible risks.

The broker is bullish on the potential for the parametric risk transfer market to grow in 2024, believing that the trends seen in 2023 will continue and perhaps accelerate,

The exposures that risk managers cite as their main concerns all tie into parametric solutions, such as business interruption and supply chain / distribution failure.

In addition, risk managers around the globe are increasingly focused on protection against cash flow / liquidity risk.

“These are risks that contribute significantly to the protection gap, and they can be directly addressed via parametric mechanisms,” Aon explained.

The broker sees four key trends emerging in parametric risk transfer in 2024.

First, the continuation of the demand surge that has been seen, with corporate and public entity buyers expected to continue to increase in number and willingness to embrace parametric risk and insurance products.

Second, Aon believes that the confidence in parametric risk transfer will continue to grow, saying, “Parametric solutions have now been tested in claims events around the world and are behaving as expected, which will lead to a much higher comfort level in going down the parametric road.”

Innovation is a third trend that will drive growth in the parametric risk transfer market, Aon believes.

“Innovation across the sector will increase, both within established perils (such as natural catastrophe and weather) and in new perils (e.g., cyber, marine cargo, and a wide variety of other indices),” the broker explained.

Adding that, “Now that there is a general understanding of parametric solutions as viable – and often vital – tools in the risk management toolbox, the 2024 discussions with clients will explore at a deeper and more granular level how parametric solutions best fits with other tools to create a more optimal risk management strategy.”

Fourth, capacity, which Aon suggests could be on the verge of increasing more significantly now that parametrics are more widely accepted, while demand is still rising and innovation is driving parametric product design and development capabilities in the insurance and reinsurance market.

In 2024, “The market will see an influx of capital,” Aon stated.

“Capacity will continue to flow into the space, both from established players increasing their capabilities and new players arriving on the scene,” the broker continued.

A diverse range of capital providers is expected to have interest in deploying to parametric risk transfer solutions.

Aon said, “This will include both traditional capital sources (insurance and reinsurance companies) as well as non-traditional (e.g., insurance-linked securities funds).”

With more capacity available it will support the parametric marketplace to expand and innovate.

“The result of this capital influx will be not only more competition on programs but also smarter and more effective structures for clients,” Aon explained.

It’s a particularly bullish outlook for the parametric risk transfer and insurance space from Aon, suggesting the broker is seeing significant demand from clients for protection solutions where its teams believe parametrics can play a role, to complement and augment traditional covers.