Every Insurer Will Regret Not Developing This Sooner!

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Tightening the insurance market means that we will see rise in premiums, increase in deductibles, and lower limits... Parametric measures can close the protection gaps that arise from the changes in the market and address the emerging risks to a certain extent. I don’t think parametric insurance is intended to replace traditional insurance programs, but to supplement them. The insurance industry should prepare for a highly volatile future by providing a reliable infrastructure that can quickly repay damage in the event of a disaster. With the growing trend of climate change, pandemic, global warming, increasing global terrorism and other issues we’re facing, the world is becoming increasingly unpredictable; and parametric approaches can help. 

What is Parametric Insurance? 

Parametric insurance (also called index-based insurance) is a non-traditional insurance product that offers pre-specified payouts based upon a trigger event. Trigger events depend on the nature of the parametric policy and can include environmental triggers such as wind speed and rainfall measurements, business-related triggers such as foot traffic and more. 

These are policies designed to fill the gaps left by traditional insurance and help provide greater financial security and support; which is a great tool for risk management because it is another way of thinking about how insurance can be used to solve problems that cannot be measured by traditional methods. 

For example, if a tornado crashes with a modular payout based on wind speed and exact location, the payout system can be further developed to ensure that the insurance company is liable for property, property and life damage in accordance with the severity of the tornado. 

How does it work on a high level? 

Parametric solutions have been introduced into corporate insurance since the late 1990s, and have been available since then. As established insurers and insurtechs started to offer parametric products, it is becoming increasingly common in our market. The promising thing about parametric insurance is that it can fill the gaps in a way that traditional policies cannot, and throw a broader net of solutions over events that might otherwise be considered uninsurable. Insurance solutions may provide alternative financing for losses not possible with traditional insurance products, as they can only compensate for actual losses suffered, but not for the risk of future losses. 

Speaking of industry transformation and events, there is one destination where the insurance industry gathers - InsureTech Connect. The impact of new products & business models in insurance like parametric insurance will be one of many topics covered. I've been to all ITC conferences, and take my word: there is no experience like it! ITC was kind enough to offer $200 off of tickets for readers of this Newsletter - Future of Insurance.

2 main differentiations that fascinate me about parametric solutions are; 

1. Data-driven = objective: parametric insurance is based on pre-agreed parametric triggers, meaning based on the figures and real data sources, rather than opinions or assessments, and this invites objectivity and has a great contribution to trust that customers look for. 
2. Customer experience: because parametric insurance is based on pre-agreed triggers, the claims settlement process is data-driven and quick super pay-outs are possible, it’s pretty straight-forward. 

Some examples

The most common use of parametric is the weather insurance, which helps to protect businesses from financial burdens from weather events, but there are many more areas we see examples of parametric solutions: agriculture, financial markets, even a “disgrace parametric insurance” was introduced by SpottedRisk against scandals and related events celebrities might experience. 

In the context of the challenges posed by COVID-19, parametric insurance is proving to be crucial for the future of insurance. The use of big data and mobile technology for new and innovative solutions is revolutionizing the once traditional insurance sector. Ultimately, it is the relative uncertainties that make these solutions work in insurance. 

Don’t take this as a full list of parametric solution providers at all, but I wanted to share at least some of them here to give you more insights and examples; 

Parametrix Insurance creates innovative quick-settlement business interruption insurance policies that cover third-party IT infrastructure downtime for cloud-computing, web hosting, applications, SaaS, ISP, and more.

Arbol: calls it “the future of coverage” and makes it easy to protect businesses against weather risk. 

Blink Parametric: offers transformative parametric insurance solutions covering climate, energy, utilities and travel risk

Flood Flash: provides fast, easy and flexible commercial flood cover to the businesses and landlords. 

New Paradigm Underwriters: utilizes proprietary parametric triggers for wind and flood that can result in a claims settlement process significantly quicker than traditional insurance.

Jumpstart: provides earthquake insurance in a simple way with $10,000 right away after a big earthquake with no deductible.

Final take-aways

Parametric solutions significantly impact the future of insurance on many different aspects: customer experience, product innovation, to fill the coverage gaps, to bring data-driven and objective framework and more. 

A couple of final points I’d like to make: 

• Parametric solutions doesn’t replace the traditional coverages, it fills the gaps and innovates
• There needs to be a loss based on the pre-agreed triggers
• Parametric solutions are becoming less expensive, if not cheaper in some cases
• It is data driven (and a perfect use case for blockchain)
• Last but not least, if you want to innovate and improve, explore parametric insurance and leverage data available out there

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Sources: Zurich North America, Amwins, Insurance Journal, Wikipedia