Protecting you from Wind, Hail, and a Zombie Apocalypse

Did you know there was insurance for a zombie apocalypse?

Just kidding, but if there ever was, I could see the risk being transferred via a parametric insurance policy.

If you haven’t heard of parametric insurance, don’t worry, you’ve come to the right place.

Let’s demystify the world of parametric insurance, shedding light on its workings, benefits, and how it differs from traditional insurance.

What is Parametric Insurance?

Parametric insurance is an innovative type of coverage that focuses on providing financial protection against specific predefined events or triggers, such as natural disasters, weather conditions, or market fluctuations.

Unlike traditional insurance, which typically assesses losses on an individual basis, parametric insurance bases its payouts on easily measurable parameters.

How Does Parametric Insurance Work?

Parametric insurance operates on a straightforward principle: when a predetermined event occurs, a payout is triggered automatically, irrespective of the actual loss or damage suffered.

This key feature sets it apart from traditional insurance, which requires in-depth assessment and verification of individual claims.

Let's consider an example to better understand how parametric insurance functions.

Suppose you're a farmer concerned about potential crop damage due to excessive rainfall.

With parametric insurance, you can set up a policy that pays out a predetermined amount if the rainfall exceeds a specific threshold.

The payout is triggered solely by the occurrence of the triggering event (in this case, rainfall above the defined threshold), rather than waiting for an appraisal of the actual damage to crops.

Why Choose Parametric Insurance?

Parametric insurance offers several advantages, making it an attractive option in this extremely hard property market:

1. Speedy Payouts: Since parametric insurance payouts are triggered automatically based on predefined events, there's no need for lengthy claims processing or complex investigations. This enables quick access to funds, allowing policyholders to recover and resume operations promptly.
2. Transparent and Objective: The parameters used in parametric insurance are typically well-defined and easily measurable. This transparency removes the subjectivity associated with traditional insurance claims assessment and reduces disputes over coverage.
3. Tailored Coverage: Parametric insurance policies can be customized to fit specific needs. Policyholders can choose relevant triggers, such as earthquake magnitude, wind speed, or rainfall levels, aligning the coverage precisely with their potential risks.
4. Risk Transfer: By opting for parametric insurance, businesses transfer the financial risks associated with certain events to the insurer. This helps protect against unforeseen losses, promoting stability and resilience in the face of uncertainties.

Types of events for Parametric Solutions

• Earthquake
• Epidemic/pandemic
• Flood
• Hailstorm
• Non-damage business interruption
• Temperature
• Wildfire
• Windstorm or hurricane

Limitations and Considerations:

While parametric insurance offers distinct advantages, it's essential to understand its limitations:

1. Basis Risk: There's a possibility of a mismatch between the payout received and the actual loss suffered, referred to as basis risk. This can occur due to variations between the chosen parameters and the individual circumstances. Policyholders should carefully assess the potential basis risk and consider it in their decision-making process. It should be noted, though, that basis risk is being tackled several ways by parametric providers. For example, one of our partners, FloodFlash, uses IoT sensors to reduce basis risk substantially. This is because they are measuring the event at every single property they insure. It is very easy to correlate depth of water at a property to the damage that would incur, thus reducing basis risk.
2. Limited Scope: Parametric insurance is most effective when covering specific risks that can be easily measured and quantified. It may not be suitable for complex risks requiring individual assessments or unique circumstances that don't align with predefined parameters.

To Buy or Not To Buy

Parametric insurance can be the alternative risk financing solution your company needs as the current property market continues to harden.

It simplifies the insurance process by streamlining claims settlements based on predefined triggers rather than subjective assessments.

Its speed, transparency, and customization make it an appealing choice for those seeking efficient and tailored coverage.

However, it's important to evaluate the potential basis risk and applicability of parametric insurance to your specific needs.

I hope this overview has provided you with a better understanding of parametric insurance and should you have any further questions, I am here to help.

Stay informed, stay protected!

Madison Urtso

Vice President, Risk Management Consultant

M?| 214 226 2809

[email protected] | MarshMMA.com