Parametric Insurance Makes an Impact

During Earth Week, a heightened awareness of environmental vulnerabilities comes to the forefront, underscoring the urgency for innovative solutions in managing climate-related risks. One solution that the insurance industry is increasingly adopting is parametric insurance, which Alex Korb, CFA, CPCU, ACI , Head of the Parametric Insurance practice at ICEYE , describes succinctly:

Parametric insurance is an insurance without a loss adjuster as we know it. Full stop. That small but subtle change in the insurance relationship has significant implications.

Technology Enabling Parametric Insurance

Technology plays a vital enabling role in parametric insurance. Companies like ICEYE use satellites with synthetic-aperture radar (SAR) to provide this critical data, as Korb explains:

Our synthetic aperture radar satellites can see through clouds, through smoke, volcanic ash, and, crucially, at night... That gives us a pretty unprecedented ability to provide real-time observation data of the Earth at very high resolution and high revisit rates.

The real-time data provided by ICEYE's satellites enable insurance companies to assess damage quickly and accurately. For instance, Korb highlights their effectiveness in wildfire monitoring: "Within 24 hours of activating our satellites to monitor wildfires, we provide binary classification of building damage." Similarly, for floods, ICEYE can assess flood depth at an individual building level within 24 hours of a flood's peak.

Machine learning (ML) and AI play a vital role in the effective implementation of parametric insurance. By processing vast data from satellites, sensors, and monitoring systems, ML and AI models can precisely identify when parametric triggers occur. These technologies help extract relevant insights from data that feed into the parametric structure. ML and AI also improve predictions around disaster risk and loss assessment.?

Understanding Parametric Insurance

Instead of assessing losses through claims adjusters, parametric policies automatically pay out based on predefined triggers, such as wind speed or rainfall amounts measured by objective data sources.

Advantages of Parametric Insurance

The parametric model offers key advantages:

1. Faster Payouts: Once the data shows the trigger event occurred, payments are made automatically without delay from claims processing. This can be crucial in providing immediate relief and starting recovery efforts, reducing the long-term impact of disasters.
2. Simplicity: With clear, measurable triggers, there is less room for disputes, as Korb states: "Consumers get very fast and transparent payments with no litigation or contentious back and forth with an insurance company."
3. Transparency: Because payouts are based on clear, measurable events, there is less room for dispute over claims, leading to a more transparent relationship between insurers and policyholders. "... insurers, quite frankly, also get a very clean contract when they know pretty much soon after an event happened whether or not they owe money," Korb states.
4. Operational Efficiency: This rapid assessment capability also significantly enhances operational efficiency for insurers. "This type of near real-time observational risk intelligence that we provide, those are the types of decisions and improvements in operational workflows and financial outcomes that our technology supports for the insurers," Korb notes.

Disadvantages of Parametric Insurance

There are some inherent drawbacks to consider with regard to parametric insurance. For example, basis risk is commonly noted. According to the National Association of Insurance Commissioners (NAIC) :

The economic losses of the insured could differ by any margin from the amount of coverage, or the insured could have losses without the parameter being triggered.

As Swiss Re notes in “10 myths about parametric insurance”,? parametric solutions are not the cure-all for every risk:

The fundamental requirement is always to have a trigger that is fortuitous, can be modeled, and is correlated with the financial exposure of the insured.

Dive In Deeper

To gain deeper insights into the transformative potential of parametric insurance and SAR technology, tune into our exclusive video interview with Korb. In an engaging style, Korb provides a firsthand perspective on how cutting-edge satellite technology and parametric insurance are modernizing the insurance industry's approach to risk management. He delves into the unique advantages of parametric insurance, sharing real-world examples of how rapidly accessible data empowers insurers to provide swift payouts in the aftermath of natural disasters.?

Final Thoughts

The future of parametric insurance looks promising as more insurers recognize its potential to provide effective coverage in areas with high risks of natural disasters. As climate change continues to increase the severity and frequency of natural disasters, the demand for innovative insurance solutions, such as parametric insurance, is likely to grow. As parametric products grow, leveraging cutting-edge data science, ML, and AI will be critical for ensuring parametrics operate seamlessly based on real-world conditions.?

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