In September, Dan Reynolds, Editor-in-Chief of Risk & Insurance, spoke with Tanguy Touffut, CEO and co-founder of Descartes Underwriting, following his participation in the Rendez-Vous de Septembre in Monte Carlo. The following is a transcript of their conversation, edited for clarity and brevity.
Risk & Insurance: Thanks for taking the time to meet with us, Tanguy. What impressions did you gain regarding the appetite for parametric reinsurance during your time at Monte Carlo?
Tanguy Touffut: The demand I’m noticing stems from the 2023 renewal season, when reinsurers increased retentions, raised reinsurance costs, and reduced limits. While market conditions are softening now, retentions remain a key issue.
In the US markets, secondary perils were a hot topic for cedants during the first half of the year. Severe convective storms—such as hailstorms, derechos, tornadoes, and straight-line winds—were responsible for many of the losses, along with wildfires, particularly in California. These losses were largely absorbed by insurers, rather than reinsurers, though California wildfires were a notable exception.
Parametric reinsurance could be a solution for covering both the first layer and excess layers. This is one of the key drivers behind the increased demand.
Another factor is that parametric reinsurance functions as a more sophisticated form of industry loss warranty (ILW). Instead of providing protection against market losses, parametric solutions use an insurer’s own potential losses to replace traditional market loss metrics.
It is a bespoke approach. We either use vendor models to ensure we are insuring the modelled losses of insurers, or we replicate their portfolios to ensure the product responds appropriately.
I see parametric insurance as the future of ILWs, providing coverage for the first or excess layers. While at present it is primarily focused on severe convective storms in the US, I anticipate growing demand for earthquake and hurricane coverage, depending on market conditions.
Risk & Insurance: Which perils are generating the most interest in the market at the moment?
Tanguy Touffut: In the US, secondary perils are certainly generating the most interest, largely driven by climate change. Secondary perils are becoming as significant an issue as primary perils such as hurricanes or earthquakes. The majority of losses over the past year or two have come from these secondary events, with a sharp increase in frequency. This is where parametric insurance can play a key role.
Risk & Insurance: Which types of carriers are showing interest in your reinsurance products? Are major US primary carriers among them?
Tanguy Touffut: There is strong demand from the largest motor insurers in the US, particularly due to the risk of hailstorms, which could cause substantial losses for the motor insurance industry. We collaborate with nationwide carriers, exclusively through brokers, whether directly or via insurance brokers.
Beyond large motor insurers, we are also seeing interest from more focused players in the Midwest seeking specialised coverage, such as crop insurance, hurricane protection, and flood insurance. Flood risk, in particular, is becoming an increasingly pressing issue in the US market.
Risk & Insurance: What trends are you seeing in the alternative energy sector, particularly solar, with regard to risk management for hailstorm damage to installations?
Tanguy Touffut: We cover both solar and wind farms worldwide, with significant demand from the US, particularly in Texas and Colorado.
Hail risk has become a much more significant issue in the past five to ten years, mainly due to the substantial investments being made in hail-prone states. For instance, when building a solar farm in California, the likelihood of facing severe hailstorms is relatively low.
However, it’s a very different story in places like Colorado and Texas. These states are dynamic and see heavy investment, but they are also prone to severe weather. A significant hailstorm could wipe out an entire solar farm within minutes. The vulnerability of solar panels depends on the technology used—some are more resilient to hailstones, while others are more vulnerable to larger stones.
It’s a major issue, with losses exceeding $50 million from hail damage to solar farms in the US over the last five years alone.
Unfortunately, these trends are set to continue, driven by climate change. We are seeing increasingly severe and frequent hailstorms, with the frequency of such events having increased around four-fold over the last fifty years.
Tanguy Touffut: I’ve been involved in the parametric insurance space for just over ten years—specifically, eleven years.
Risk & Insurance: How would you characterise the growth of parametric insurance during your eleven years in the industry?
Tanguy Touffut: If we look back at the parametric insurance market fifteen years ago, it was relatively small, focused mainly on a few countries and covering only earthquake and hurricane risks. Today, we operate in 60 countries, meaning parametric insurance has expanded globally, from Southeast Asia to Latin America and Africa.
The range of perils covered has grown exponentially. In Germany, for example, we cover the lack of wind energy output for wind farms. In Australia, we cover frost risk, which may surprise people given the country’s association with hailstorms, cyclones, and droughts. In the US, we cover flood risks, and tornadoes continue to be a major concern in the Midwest.
There has been clear expansion, both in terms of geography and the types of perils covered. All the key brokers have established competence centres or at least dedicated teams promoting parametric solutions. In terms of capacity, we launched a fund with Generali and Lumyna that provides capacity from the insurance-linked securities market, demonstrating appetite from investors beyond traditional reinsurers.
While I would never be fully satisfied with the market’s growth rate—I would love to see it expand even faster—I am pleased with our role in modernising the market and improving product features. The ability to pay claims quickly has historically been a pain point in our industry for decades, or even centuries, and we are working hard to address that.