From niche to mainstream

How to stay ahead in an evolving market environment

Whilst product awareness and education remain challenges – notably in the retail broker and direct segments – parametric insurance teams are faced with increasingly complex challenges around how to differentiate and stay ahead in an evolving market environment.

As the first of a two-part series dedicated to understanding parametric insurance, we will seek to demystify the product and outline the core features of the product, as well as highlight the important role that parametrics can play in building resilience while helping to close a widening insurance protection gap.

We expect the parametric insurance sector to play a key role in driving innovation across the industry. It will play a significant role as a solution to catastrophic events, as well as being a disruptor in how data is used to enhance risk pricing and modelling and how technology is integrated through partnerships and across ecosystems.

Introduction to Parametric Insurance

A parametric product is a type of insurance cover that settles on a pre-agreed parameter or index. The payout depends on the occurrence of a triggering event (e.g., due to a weather event, a cyber / terrorism attack, a strike, epidemic / pandemic, etc), regardless of the actual loss. An independent third party determines the intensity of the event and with it the impact on the claim. As a result, there’s no need for a claims adjustment after the event occurs unlike with a traditional indemnity-based product.
Key differences between parametric insurance and a traditional indemnity product include:

Key product benefits

Unlike a traditional indemnity-based insurance product, a parametrics cover offers the following advantages:

• Fast claims payments: Parametric coverages can simplify disputes over coverage intentions and settle on confirmation of a 3rd party independent index threshold being breached – with the promise of a certain and rapid payout, meaning that the policyholder can recover faster.
• Claims certainty and transparency: For the policyholder, the exact amount to be paid is clear as well as the relevant conditions, which removes all ambiguity and which utilises an independent source to define the mechanics of any payment.
• Insuring difficult-to-cover risks: Parametric insurance pushes the boundaries of traditional insurance by using data to offer alternative means to underwrite difficult-to-insure losses – unanticipated expenses, lost wages, revenue shortfall – and to offer alternative settlement processes (e.g., real-time payments, advanced payments).
• Cost efficient: Through extensive use of data on pricing, parametric insurance simplifies the underwriting process, saving embedded costs and reducing the amount of time required to quote and bind a policy.
• Bespoke solutions: Contrary to conventional insurance policies that tend to have standardised policy wordings, parametric policies are tailor-made, allowing the consumer, corporate body or government entity to select the metrics, thresholds and payments they want to be protected against and the reimbursement amounts they desire to receive.
• Protecting revenue volatility: From an investor’s perspective, parametric insurance can effectively reduce the volatility of a company or a project’s financial results, making them more willing to lend or invest into a company / project.
  

The future of parametrics

Technological advances combined with economic and strategic challenges are prompting the (re)insurance industry to rapidly change and adapt. The industry is assessing how they can best combine their data analysis and risk transfer core capabilities with the new opportunities arising from increased use of technologies, including satellite, IoT data and blockchain-enabled smart contracts.

Parametric insurance has demonstrated how the use of data and technology can reshape the capabilities of the insurance sector to better meet gaps and address evolving needs. Parametric instruments provide a solution that expands the traditional insurance market to tackle larger societal problems, such as natural disasters due to climate change.

Parametric covers are rapidly being adopted at local, regional and national level, enabling coverage for previously difficult-to-insure risks and / or new risks that are currently uninsurable. In the process, it can fulfill its wide-ranging potential and play a key part in closing the protection gap and making society more resilient alongside traditional insurance, as well as other novel forms of risk transfer.