5 Trends for 2025: Parametrics

Overview

Insurers continue to seek new insurance product structures to leverage investments in technology, the explosion of internet of things (IoT) data and shifts in underlying risk exposures that require better and more precise underwriting and pricing.? As these shifting dynamics drive innovation, new insurance products based on parametric solutions have taken shape.? For our discussion, parametrics refers to an insurance contract structure that relies on a “trigger” event (the parameter) to generate an insurance claim.? The benefit of a parametric product is its simplicity and flexibility, as any agreed upon event can be utilized for the trigger. ?Parametrics opens the door for new insurance markets and segments.

Parametrics policies result in:

???Instantaneous claims settlement – essentially removing the LAE cost from the carrier’s expense portfolio.? On average, this can improve a carrier’s core Combined Ratio by 10 – 12%

???Flexible contract – the trigger can be anything, ranging from an agreed upon 3rd party data point (such as a NOAA weather event), the amount of rain from a sensor, physical loss conditions such as smoke, etc.

?? Built for the Internet of Things – parametric policies are well suited to take advantage of the growth in IoT enabled devices and data.? Unlike traditional policies that are reactive, parametric policies can easily provide additional risk management and data-driven insights to insureds and customers.

And while parametrics provides the opportunity for significant benefit, these models also introduce key challenges related to:

?? Domain Knowledge – few carriers have the technical capabilities to build and manage IoT device deployments at scale, build the underlying cloud-based infrastructure and automation required to support parametric policies

???Basis Risk – parametric policies are harder to accurately price due to their pre-agreed claims settlement feature, introducing possible regulatory challenges and possible gaps in consumer coverage

Parametrics 101

Parametrics policies are based on five key capabilities which together form the basis of the policy and claims lifecycle.?

-??Define Trigger - parametric policies are based on a trigger which establishes the pre-agreed terms of the loss pay-out.? Triggers can be any quantifiable parameter, including but not limited to: windspeed, temperature, pressure, vibration, time, water, hail, financial instruments, supply chain, events, goods in transit, transportation, etc.

-? Issue Policy - parametric policies exhibit a simpler structure versus traditional policies due to the simplified nature of the underlying loss terms.? The contract will include common elements such as exposures, policy period as well as a definition of the loss parameter trigger(s).? More sophisticated products may include composite triggers that require multiple triggers to occur within a set time period to generate a loss.

-??Trigger Monitoring - continuous monitoring of the underlying exposures is performed through an integration to one or more monitoring platforms.? These platforms are typically integrated using modern RESTful APIs which allow for data streaming-based consumption of environmental data.?

-? Claim - upon execution of the triggering event(s), a call is made to the claims system to generate the claims first notice of loss (FNOL).? Because the parametric is invoked automatically, business rules within the claims system can be established to support straight-through-processing of the reserve creation (equivalent to the trigger pay-out) and execution of any fraud / workflow rules.

-??Settlement - upon creation of the claims record, invocation of any necessary validation rules is called and automated payment based on the agreed trigger pay-out from the policy is performed in a straight-through-processing manner.

Getting Started

To start a parametrics journey, we frequently work with insurers utilizing a four-step model that emphasizes defining real-world use cases, establishing enterprise value and scaling over time to build a “quick start” solution in as short at 2-3 months.? By utilizing a build-test-learn approach – carriers can better avoid high up-front capital expenditures while simultaneously testing market responses and real-world benefits realization.?

Conclusion

Interest in parametric-based solutions has increased significantly in the EMEA and North American markets as an outcome of increasing loss frequency and severity of physical risks.? However, parametrics is not new and for some APAC markets insurers have successfully written 40% or more of their new small commercial insurance through these models.? We believe the growth of parametrics will continue to increase as the convergence of new technologies and shifting risk profiles call for a new model of modular, data-driven insurance products.?

Contributors

Imran Ilyas, Partner, Advisory Delivery Excellence Leader and Global Guidewire Leader, PwC

Matthew Wolff , Partner, Functional & Industry Technology, PwC

Dan Segura , Manager, Functional & Industry Technology, PwC

This material is written for non-commercial purposes and does not represent the opinion of my employer. Reproduction prohibited without express written permission.