Alternative options to limited Nat Cat capacity:

Where traditional Nat Cat capacity is constrained, a range of alternative risk transfer solutions may be available to help address capacity challenges and enhance coverage. The suitability and availability of these options will depend on the specific project, geographic locations, values at risk, prevailing market conditions and insurer appetite. As each risk is unique, solutions should be considered on a case-by-case basis, with terms, limits, exclusions, triggers and pricing subject to underwriting review.

Single peril excess of loss (XoL)

Single peril XOL coverage focuses on protecting against specific perils, such as hurricanes, floods, or earthquakes, rather than broad, multi-peril coverage. In this arrangement, the insurer covers losses exceeding a predefined threshold (retention) for a single peril. By narrowing the scope of coverage, insurers can help manage exposure and allocate capacity to areas with the greatest demand, while reinsurers benefit from simpler risk modelling and pricing. This approach may also limit exposure to simultaneous or multi-source losses, making it a potentially effective way to expand underwriting capabilities and offer a more competitive price for that specific peril as a standalone cover.

For some projects, Gallagher Specialty may be able to explore the option of excluding or reducing the limit for a specific peril (eg hurricane/cyclone, flood or earthquake) within the primary construction policy and addressing whether standalone cover is available. The feasibility and commercial viability of this approach will depend on the individual risk, available market capacity and underwriting appetite at time of placement.

Parametric insurance

Parametric insurance complements traditional insurance coverage and can provide swift financial protection in the event of a predefined trigger, such as a hurricane reaching a certain wind speed or an earthquake exceeding a specific magnitude, irrespective of the nature of the loss or the nature of the damage. This approach can allow for faster payouts and is particularly effective in regions where traditional models struggle to provide coverage or where loss potential is highly unpredictable. By using clear triggers, insurers can confidently offer higher limits without the risk of unforeseen losses. To enhance these solutions, Gallagher has established a Parametric Centre of Excellence, combining expertise in analytics, alternative risk transfer, and climate strategy to deliver improved advisory, modelling, and placement services. The parametric coverage is more expansive than traditional insurances which need to have the trigger of damage. They may also provide coverage for uninsurable assets in highly exposed locations, provide pure economic losses as a result of damage or non-damage, and provide quick access to cash with no financial deductible.

However Parametric does have some limitation which is basis risk, this arises when the parametric index, risk triggers or data quality do not match the actual loss suffered and payouts can be less than the actual loss sustained. This is why Parametric insurance can work well as a compliment to traditional insurance and not always as a replacement to it.

Deductible buy-down coverage

In high-risk areas, construction projects often face high deductibles, which can strain clients’ finances in the event of a Nat Cat events. Deductible buy-down coverage is a standalone policy which can be purchased to reduce these deductibles, providing financial relief and protecting balance sheets. This solution is particularly valuable for large or high-value projects, which may have a deductible which is linked to a percentage of the value at risk at the time of loss. This can result in significant deductible values being applied. While this coverage may offer clear financial benefits, clients must carefully weigh the premium costs against the likelihood of a catastrophic event, their appetite for risk transfer and their ability to absorb large deductibles.

Insurance linked securities (ILS) / Catastrophe bonds (Cat Bonds)

Insurance-linked securities (ILS), such as catastrophe bonds, allow insurers to transfer disaster-related risks to global investors, providing additional capacity for high-severity, low-frequency events. Investors receive regular interest payments, but if a specified catastrophic event occurs, the principal is used to cover the insurer’s losses. If no event occurs, the principal is returned at the bond’s maturity.

Catastrophe bonds are particularly effective for supplementing capacity in disaster-prone areas, enabling insurers to tap into global capital markets and distribute risk more broadly. Their transparent triggers and rapid payouts appeal to both insurers and investors, making them a valuable complement to traditional reinsurance.