Parametric insurance is not here to replace traditional insurance solutions. On the contrary, it is here to complement them and fill gaps that traditional insurance offerings are failing to do (e.g. deductibles, exclusions etc.).
Surrounded by a large necessity for product innovation and the immense amount of data available nowadays, insurers are under pressure to look beyond traditional insurance offerings and focus on solutions covering much wider scopes of coverage, exposure, and peril.
There is an obvious need today for an insurer to react immediately to insured losses and compensate clients quickly with flexible and fast risk management. As such, transparency and speed in claims handling have become a priority. But how does an insurance company ensure claims pay-outs with no actual physical damage to an asset whilst also answering clients’ demands for new and affordable insurance solutions to cover their losses in a fast and convenient claims process? The answer is parametric insurance.
What is parametric insurance?
Compared to traditional insurance policies which pay out a claim in accordance with the value of the loss that has occurred, parametric insurance pays out upon the occurrence of a certain event. This means the indemnity is not based on the costs that have occurred but on the size of the event – for example: water levels or the amount of rainfall. It takes into account the probability of a predefined event happening and pays out the claim in accordance with a pre-established scheme. This allows the claim to be handled in a simple and fast way based on independently verifiable and unambiguous parameters.
Driving forces
There are two major components driving parametric insurance and determining what the scope of the policy will be, at what price, and under which reimbursement conditions. The first is a triggering event. Here insurance cover becomes active when event parameters that have been predefined are met or exceeded. The second is the pay-out process. This is a predetermined payment if the limit is reached or exceeded, no matter what actual physical loss was sustained.
For parametric insurance dependent on certain factors, it is essential to ensure that these parameters are measurable, objective, transparent and consistently applied. Of utmost importance is that neither the insured nor the risk carrier can affect the event driving the parametric insurance.
Advantages of parametric insurance
Parametric insurance has three main advantages. Primarily, it offers competitive and more affordable pricing with predetermined limits. Secondly, it is a tailor-made and flexible insurance policy that can be valid for a few days or a few years. And finally, it offers a better client experience by providing innovative insurance solutions and fast claims settlements and pay-outs.
Parametric insurance is not here to replace traditional insurance solutions. On the contrary, it is here to complement them and fill gaps that traditional insurance offerings are failing to do (e.g. deductibles, exclusions etc.). With this type of insurance, it is possible to push and expand the boundaries of insurability, eliminate complexities more often seen in traditional insurance processes, and provide clients with complete confidence when it comes to claim management and payout speed.
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