ART is a fast growing area in the commercial insurance market. According to industry sources, the amount of available alternative capital has grown by about 410 per cent from US$19 billion in 2008 to US$97 billion in 2018. In contrast, the amount of available traditional capital increased by just over 50 per cent in the same period.
In February, MAS launched the ILS grant scheme, which will fund up to 100 per cent of upfront issuance costs of a ILS bond in Singapore, to catalyse the ILS market here. "Think about a hotel in Macau, as an example, after a typhoon. It's not the physical damage to buildings, that's covered by traditional insurance. Because there is no access to the hotel there is a loss in revenue, less nights spend. If the hotel is running a casino, there is less revenue from the casino, gift shop and other facilities. So we look at the weather as the trigger ," he said.
Once those parameters are triggered, the ART coverage pays out. This means risk managers can effectively plan for and cover losses of revenue that are not related to physical damage. ART solutions are also helping to open avenues for insurance to clients that may otherwise be shut because their insurer is not able to take more risks onto its books.
For example, in a renewable energy plant where costs are often benchmarked against those that run on fossil fuel, the cost of financing and its projected revenue are key considerations to getting the project off the ground. Parametrics can make a seemingly unviable project viable. A solar farm insured under parametrics can receive a payout if the number of sunny days in a year does not hit a predefined minimum.
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