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Parametrics could hedge re/insurers Florida AOB exposure


Date: July 05, 2017
Source: Reinsurance News
Author:  Luke Gallin


A claims abuse epidemic, widely known as the assignment of benefits (AOB) issuecontinues to hinder the Florida market, but parametric risk transfer solutions could be utilised to help fund losses driven by higher claims totals, New Paradigm Underwriters recently toldArtemis.

Artemis explained that the assignment of benefits (AOB) issue can occur when an insured passes over the right to act as the insured to another entity, such as a lawyer or a contractor, which in turn can result in lawyers demanding increased claims for smaller storms, for example, ultimately leading to outsized losses for reinsurers.

In Florida, AOB abuse has been especially prevalent as a result of water claims, explained Artemis.

“The AOB abuse that has become such an issue this year is related to water claims, which can become an especially prevalent issue for the insurance and reinsurance market after less severe hurricanes or tropical storms that soak the region, or cause surges to flow into properties.

“AOB abuse has exploded across Florida in recent years, resulting in an escalation of legal costs with insurers often becoming the backstop for ballooning claims,” said Artemis.

With the 2017 Atlantic hurricane season expected to be an active one, insurance firms could start calling on their reinsurance protection as their own losses from smaller storms rise on the back of any AOB abuse throughout the claims process. In turn, the insurance and reinsurance industry loss from storm activity could actually be some way above the modelled expectation, whichcould see “reinsurance layers come into play for an event that they were never designed to,” said Artemis.

Speaking to Artemis, Evan Glassman, Chief Executive Officer (CEO) of parametric transfer specialist, New Paradigm Underwriters, highlighted the potential for parametric risk transfer solutions to protect against increasing, or outsized losses.

“Parametric Risk Transfer can be used to bring in supplemental capacity to fund these potential losses.

“Coverage can be Statewide, or can be lasered in around specific AOB hot spots and cedants underlying exposures. Coverage is transparently triggered, and settlement is completed within days of the storms providing immediate liquidity that can offset losses, and protect profits and assets,” said Glassman.

A parametric trigger structure, which is used in the traditional insurance and reinsurance marketplace as well as the expanding alternative, or convergence space, provides rapid-payout once a pre-defined trigger has been met.

In the case of Florida and the AOB abuse issue, a parametric solution could be designed to pay-out based on winds speeds experienced, or the height of water from a storm surge, explained our sister publication Artemis.

“In that way, a reinsurance or ILS capacity provider can put in place a hedge against AOB claims escalation occurring, by buying parametric protection.

“A parametric risk transfer product would also be relevant to insurance carriers operating in Florida, as it can provide a useful corporate risk transfer tool (so insurance for an insurer) against the impacts of storms above a certain size or strength hitting the state,” continued Artemis.

A parametric risk transfer solution could be an opportunity for companies to achieve risk protection from a growing issue, and with legislation to tackle the AOB epidemic in Florida seemingly some way off, insurers and reinsurers could well look to parametric solutions to provide them with protection against rising claims totals in the months ahead.