An Alternative Insurance Option For Any Property Owner...Even If You've Had Prior Claims

We are starting to see the beginning of a potential insurance crisis.

In states like Florida and California, some property owners are finding that there is no coverage that can be had...at any price! In Florida, many carriers have gone insolvent, pulled out of the state, or ceased writing any new business. This has put a lot of pressure on the insurer of last-resort, Citizens. As Citizens grows and grows, higher valued properties are already experiencing the scarcity of coverage because, for most of the state, homes in excess of $700,000 in replacement value ($1 million in Miami-Dade) do not qualify for Citizens. We are hearing story after story about the lack of wind coverage for these homes. California? Similar problem. Large catastrophic wildfire losses in recent years has caused insurers to pull back. The result is a lack of capacity and entire communities that are unable to secure adequate coverage in wildfire prone areas. This may become the new normal for some states exposed to extreme weather. What are property owner's to do?

One option that is probably going to get more attention (even though the solution has been around for quite some time) is called Parametric Insurance.

The name doesn't provide any hint at what it does so we will describe it briefly here and do a lot of future work in this area (and perhaps even rebrand that name!).

The elegance of a Parametric policy is in its simplicity, specifically, what causes a policy to pay and how quickly it will pay. In order for a traditional insurance policy to pay, a claim trigger needs to occur. For traditional indemnity policies, the payout occurs when damage occurs to a covered property for a covered peril. The payout depends on the amount of damage and it can take months or years to square all of this away. The long claims cycle is a drawback to a traditional indemnity insurance policy.

On the other hand, Parametric Insurance is much, MUCH simpler. A Parametric Insurance Policy pays out when a single trigger hits. For a Parametric wind policy, a policyholder just needs the wind speed to go beyond some threshold for the policy to trigger and pay. THAT'S IT. It seems almost too good to be true. Why would an insurer even offer something like this? It's simple, quite actually.

1. Easy underwriting - the insurer does not need to know a loss history, whether the property owner may pose a moral hazard, or even be looking to commit fraud. For underwriting, the insurer just needs a dot on a map, what the policy trigger is going to be, and a model to estimate the frequency and severity of loss
2. Easy payouts - According to claims professionals, the best claim is a closed claim. Because the trigger instantly kicks off a claim process and because most Parametric claims payout within 48 hours, there are no long claims cycles. No re-opening of claims (like say a roof claim 2 years after a hurricane).
3. Limits are smaller - Parametric policies are usually purchased with $10k-$100k limits keeping aggregations under better control.
4. Insurers themselves buy this sort of coverage - Complex insurers have been buying parametric style coverages for decades to button up their CAT exposures inadequately protect by reinsurance.

It's so simple that it can be digitized with smart contracts reducing overhead and distribution overhead. Savings that could be passed along to the property owner. Parametric Insurance policies are available for Florida hurricane, California earthquake, Wildfire, and Flood exposure. For any lack of extreme weather or natural catastrophe coverage, all that is needed is a trigger and a model to estimate losses.

SUMMARY

Parametric Insurance is a simplified form of insurance that property owners can get easy access to when traditional indemnity coverage is challenging to get:

• Unlike traditional insurance, Parametric coverage is available for nearly everyone, even if you have had prior claims or live in severe risk area.
• There is NO deductible. The trigger hits and you get paid.
• Wind, flood, wildfire and earthquake are all common perils where coverage is currently available.

Green Shield's mission is to create a world resilient to climate disasters. We see Parametric Insurance as a critical property owner solution to climate disasters that can help them bounce back fast! We will expand on this topic in future articles.