Professional Insight

Beryl Hits, CAT Bond Misses

By XUAN YOU
Posted on Business and Technology Emerging Issues

As of August 2024, the National Oceanic and Atmospheric Administration’s (NOAA) 2024 Atlantic Hurricane Season forecast predicted an above-normal hurricane season this year with a range of 17-25 total named storms. Of those, eight to 13 were forecast to become hurricanes, including four to seven major hurricanes (category 3, 4 or 5). Insured losses from hurricanes continue to rise such as with Hurricane Beryl in the U.S. where estimates of insured losses have increased to $2.7 billion-$4.5 billion as of August 2024. With the increase in frequency and severity of hurricanes, many are turning to alternative risk transfer solutions such as parametric insurance for coverage.

Parametric insurance, a type of index-based insurance, is gaining increased attention for CAT risks and offers quick payouts based on predefined triggers like wind speed or rainfall levels, rather than actual losses. It is a fast-growing market; as of 2022, the parametric insurance market was valued at $12.2 billion and is expected to reach $29.1 billion by 2032, at a compound annual growth rate of 9.2%, according to DataHorizzon Research. However, one example from Hurricane Beryl underscores the issue of basis risk associated with parametric insurance. A $150 million CAT bond sponsored by Jamaica did not trigger a payout despite significant damage because the air pressure threshold was not met.

What this means for actuaries: While parametric insurance offers faster payouts and flexibility, it poses challenges for actuaries. These include managing basis risk, where payouts may not align with actual losses; pricing, which requires analyzing index data and financial impact beyond historical information; and ensuring data reliability from independent, unbiased sources like national weather services or specialist firms. Actuaries must understand the data and any potential biases to establish accurate indices.

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