Parametric for super-fast payment
"Technology aside, entirely new things in insurance come along very rarely. Parametric insurance is one of those major innovations. It’s taking off because it creates certainty, offers an alternative way to cover risks that traditional insurance may not fully address – from the first dollar lost, without exclusions or deductibles – and pays lightning fast," says Mark Rogers, Vice President of Business Development at Vitesse.
Parametric policies address a wide range of risks, from flight cancellations to flooding, by offering pre-agreed payouts triggered by specific events. This streamlined approach eliminates the need for traditional claim adjustments, significantly accelerating payouts. It also extends coverage to intangible losses, such as reputational damage or business interruption, which are often challenging for conventional insurance to handle swiftly and effectively.
A wide application
Parametric insurance is beneficial to all sorts of industries and scenarios. Cancelled flight insurance is just one example of coverage that pays small claims for common loss events. Others include flood insurance which responds when sensors detect high water levels at an insured property, and heatwave insurance that protects dairy farmers’ incomes when their cows give less milk after a spell of very hot weather.
"Another important use of parametric insurance is supplementing conventional coverage to protect corporations from natural catastrophes. With climate change, insurance for wildfires, hurricanes, and dramatic hail storms has become much more difficult to buy. Parametric products can fill the gap by providing instant payments to cover immediate costs, such as securing property or temporary accommodation, without affecting the larger claims process. For example, a homeowner might receive £5,000 to cover emergency repairs and hotel stays while waiting for a full assessment and payout from their standard insurer."
"On a larger scale, parametric coverage can be used to protect investors in major construction projects. For example, several insurers joined together to insure the construction of a huge dam in Nepal against the risk of earthquake. The policy limit rises each year, with the value of the project. The proximity and magnitude of an earthquake dictate the proportion of the limit to be paid as a claim, because the damage caused by such an event could vary from none to a total loss," he continues.
Parametric products are also widely used to provide countries with an injection of liquid cash when a natural catastrophe occurs. For example, Hurricane Beryl, which cut through the Caribbean earlier this year, triggered several parametric insurance policies acquired, with the help of the World Bank, by impoverished nations there.
Tech-driven
"Technology has made this newfangled coverage possible. Most of the risk carriers that provide parametric policies are familiar, traditional insurance companies. They usually collaborate with Insurtech partners who have developed systems to analyse the huge quantities of data which must be parsed to assess and price risk accurately, and to monitor and calculate data to determine when parametric claims are due. These partnerships are shaping the industry, allowing insurers to leverage cutting-edge technological innovations to better serve their customers."
Enhanced technologies are significantly boosting the value of parametric insurance. One standout advantage is the rapid payout of claims compared to traditional, adjusted coverage. For instance, imagine a traveller stuck at the airport due to a flight cancellation. With a parametric policy, they could receive a fixed payout for the cancellation, plus additional compensation for each hour of delay—often after just a short waiting period—providing much-needed financial support almost immediately.
"The technology fuelling advanced payment systems such as those delivered by Vitesse can transfer their compensation immediately, before they leave the airport, to fund dinner and a hotel room. It could go in any currency to her digital wallet, credit card, or bank account. That kind of responsiveness maximises the huge parametric advantage of being able to pay without adjusting."
Growth market
Parametric insurance is poised for significant growth in the coming years, driven by its immense utility and flexibility. Recognising its potential, many of the world’s leading insurance brokers and re/insurers have already established dedicated parametric divisions, underscoring their commitment to this innovative approach and its ability to meet evolving market needs.
"It’s clear to see why they’re investing and will continue to do so. As the insurability of many risks changes, parametric (which also gives insurers much greater certainty of their future liabilities) is better able to cope with that changing landscape. It is flexible and practical when it comes to filling the gaps left under traditional insurance policies. So the first new thing in insurance is likely to endure."
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