Parametric Insurance: A Flexible Solution for a Hard Property Market

In recent years, the frequency and severity of natural disasters have increased dramatically, meanwhile the losses ratios that insurance carriers have forecasted have not been sustained by the premium collected. This has led to the hardest property market that most brokers have ever seen. As companies know traditional property insurance policies provide coverage for damages caused by a variety of perils including named storms. However, with the increasing risk of these events occurring due to climate change and a variety of other factors, insurance companies are no longer offering the amount of capacity desired by many companies, or if they are offered, they are having to be layered with smaller capacity for multiple insurance carriers.?And in some circumstances insurance carriers are increasing the named storm deductible beyond levels that companies can afford. In a meeting last week, a wholesale broker said they saw for the first time a carrier asking for a 15% deductible for named storm for a client in Louisiana. This wholesaler said it was the first time they had ever seen a deductible that high.

While companies are getting hammered with increased premiums, as well as increased deductibles, they should do their due diligence to see what other options may be available. As well as brokers should be providing alternative options where applicable to organizations that have a sizable statement of values, especially in the coastal areas. One of those options is parametric insurance, which is a type of insurance that is designed to provide coverage for specific events, such as named storms, earthquakes, or other natural disasters. It differs from traditional insurance policies in that it pays out based on pre-determined parameters, such as the magnitude of the storm, rather than actual losses incurred by the policyholder.

One advantage of parametric insurance is that it provides quick payouts to policyholders in the event of a covered loss. Since the payout is based on pre-determined parameters, there is no need for claims adjusters to assess the damages, which can often take weeks or months to complete. Instead, policyholders can receive their payouts within days or even hours of a defined event. These policies do not function like traditional property insurance and are specifically well suited for organizations that have high risk to property exposure but need to maintain positive cash flow. In a traditional property placement, waiting on a business income claim to get paid out several months?after the event has occurred can drastically damage a company’s cash flow. It is also extremely time consuming, which anyone who has been through a business income claim can attest. Obtaining the necessary information from a CFO, risk manager, or business owner to adjust traditional business income claim cause cause significant distraction of resources for a long duration of time for companies.

Another advantage of parametric insurance is the ability to customized?the insurance to meet specific needs of a policyholder. For example, a company may choose to purchase parametric insurance that provides coverage for lost revenue due to a specific area, with a specific wind speed, rather than just purchase named storm coverage in a traditional property policy. This type of coverage can also be especially beneficial for businesses that rely heavily on seasonal revenue or are in areas that are prone to named storms, or other perils that take time to adjust for after a claim has occurred.

When it comes to named storms, many traditional property insurance policies have exclusions or limitations that may not provide adequate coverage. For instance, some policies may exclude coverage for flooding or wind damage caused by named storms, or they may have high deductibles that are difficult for policyholders to meet. In contrast, parametric insurance policies can be designed to provide coverage for specific triggers that are predetermined in advance of an event occurring. If the predetermined trigger or metric is met, the policy automatically pays out.

For companies that are in areas that are prone to named storms, or that rely heavily on revenue from certain seasons,?parametric insurance provides an alternative to traditional insurance policies that may not provide adequate coverage. By customizing a parametric policy to meet the specific business needs of the company, policyholders can have peace of mind knowing that they are protected if the metric/trigger that they have negotiated has been met. There are many kinds of parametric structures that can be designed, but it is important to work with a broker that has the intellectual capital to customize a solution that meets the desired outcome should a claim occur. Given the state of the property market, companies who have budgetary constraints, and need continued positive cash flow should consider this option especially going into wind season.

If you have questions about parametric insurance or other insurance questions please reach out.