Extreme Heat May Cause People To Rethink Their Insurance

"Extreme heat isn't just a weather event; it's a silent, escalating disaster wreaking havoc on health, economy, and infrastructure," warns California's insurance commissioner, Ricardo Lara, during an interview with The Wall Street Journal.

As heat waves in the U.S. intensify and become more frequent, they are causing extensive damage to infrastructure, agriculture, and industry—often not covered by standard insurance. This leads to substantial economic losses, with sectors like agriculture and construction losing an estimated $100 billion in productivity annually.

As these risks evolve, more insurance adjusters and clients are turning to parametric insurance to cover gaps in traditional policies.

Parametric Insurance Overview

Definition and Mechanism:

• Parametric Insurance: Covers predefined conditions rather than actual losses.
• Triggering Event: Insurer pays a guaranteed amount when a specific event occurs (e.g., crop yield, earthquake magnitude, flood water levels, hurricane wind speeds, pandemic infections, and power outages).
• Payout Mechanism: A fixed amount is paid once the index threshold is reached, regardless of actual losses.

Differences from Traditional Insurance:

• Faster Payouts: Claims are processed quickly, often within four weeks.
• Basis Risk: Managed differently; parametric policies may not perfectly align

index measurements with actual losses.

Advantages:

• Ease of Pricing and Underwriting
• Faster Payouts
• Flexible Policies
• Better Customer Experience

Disadvantages:

• Lack of Education and Awareness
• Significant Basis Risks
• Cost of Capacity or Distribution
• Regulatory Concerns

Cost and Usage:

• Expense: Generally more costly but can lower total risk costs when used correctly.
• Target Users: Ideal for those with high deductibles and exclusions in traditional policies.

Expansion and Applications:

• Initially for natural catastrophes, now includes non-physical damage like business interruption losses.

The Future of Parametric Insurance

As risks evolve, parametric insurance products are gaining traction as policyholders seek more innovative and efficient risk transfer methods. Kaplan highlights that parametrics took off in advanced economies like the U.S. due to the significant gap between total risk and insured risk.

Technological advancements, such as remote sensing technology and satellite data, are driving this evolution, enabling real-time measurements of hailstone size, impact velocity, and floodwater depth. Non-damage business interruption insurance, using economic performance metrics, is also emerging.

Earthvisionz can help you understand your clients’ risk exposure and provide measuring tools for parametric insurance policies. Our platform uses data from remote sensing and satellite imagery to help you manage risk exposure and send alerts when extreme weather conditions arise.

Learn More

Learn more about Earthvisionz products and how we can help you with risk management: Schedule a Demo

Want more restoration and insurance industry insights? Interested in risk management? Subscribe to Our Newsletter

Work Cited

Eglesham, Jean. "Extreme Heat Is Causing Billions in Damages That Insurers Won't Cover." The Wall Street Journal, 13 July 2024.

Rosanes, Mark. "What Is Parametric Insurance." Insurance Business, 29 Oct. 2018.