The COVID-19 pandemic revealed a number of shortcomings in traditional insurance coverage. Many business owners, for example, discovered only after the pandemic shut down their business that traditional business interruption coverage didn’t address what had happened to them.
Enter parametric insurance. By focusing on data surrounding key events, these policies streamline both insurance underwriting and claims adjustment. They are flexible enough to provide coverage for a wide range of losses, and they allow insurers to take advantage of relationships with insurtechs focused on data analysis.
Parametric policies are a new concept for many insurance customers. Providing education about their benefits can strengthen relationships and encourage customer buy-in.
Traditional insurance policies pay claims based on the actual losses a customer incurs. A traditional homeowners insurance policy, for example, might pay for the costs of repairs if an earthquake damages a covered structure.
Parametric insurance does not focus on actual losses. Instead, a parametric policy covers the probability of a certain event happening, like an earthquake. The policy pays a predetermined amount, stated in the policy itself, if a certain event happens and is verified by a third party.
One of the key benefits of parametric policies is their ability to reduce complexity, allowing insurers to pay on claims more quickly, write Daniel Brettler and Timothy Gosnear of Conner Strong & Buckelew. Customers have the reassurance of knowing that if the conditions are met, they’ll receive a predetermined payment, and insurers can respond to claims without taking on additional risks such as sending an adjuster to review damage in a potentially dangerous place, like a wildfire zone or hurricane disaster area.
Weather is a common triggering event for a parametric insurance policy, but it is not the only possible event that can result in payments, writes Stuart Turner in a white paper for Airmic.
Parametric insurance is sufficiently flexible to cover a range of triggering events, as long as those events are verifiable by a third party. For example, a parametric policy may also be based on an emergency declaration by a governing body, a municipal or state-level curfew, or other factors.
“The great advantage of parametric insurance is that it removes so much uncertainty from the underwriting process,” says Adam Rimmer, cofounder of FloodFlash, an insurtech focused on parametric flood insurance. This removal of uncertainty benefits both the insurer and the customer.
Parametric insurance is poised to experience significant growth in the coming years, due primarily to two factors: The expansion of our ability to analyze data and customer concerns following the COVID-19 pandemic.
Parametric insurance offers a way for property and casualty insurance companies to cover risks that are traditionally seen as difficult, messy or impossible to cover, writes Matthew Grant, founder of Abernite and a partner with InsTech London. One benefit of parametric insurance is that it can be used to cover customers not only in the case of widespread disasters, but also in instances when customers need specialized coverage for a particular structure or venue, like a sports stadium.
This coverage becomes possible due to our unprecedented ability to gather and analyze data.
“Access to ever-improving modeling techniques and overall historical data capture has allowed for the growth of parametric solutions,” write Alex Kaplan and members of the Alternative Risk group at AmWINS.
Because data analysis can now provide extremely detailed views of the factors associated with specific types of risk, parametric policies can be tailored ever more effectively for certain risk types.
For example, Zurich Re recently introduced parametric insurance coverage for weather damage or delays to construction projects. This coverage focuses on three specific weather and climate risks: total daily rainfall, hourly average wind speed and extreme temperatures, writes Patrick McBride, construction property manager at Zurich North America. Detailed weather data can be easily collected and transmitted due to up-to-date technological tools, making the process of determining whether coverage applies quick and simple.
High-resolution data tools allow insurance companies to better understand major events and their effects. They also allow for parametric coverage that is location specific and that is better tailored to address all types of loss a location might suffer.
Parametric coverage’s need for good data analysis creates an opportunity for established insurers and insurtechs to build fruitful partnerships as well.
“Parametric insurance is one of the most promising innovations of the InsurTech revolution because it fulfills two key promises of InsurTech: operational efficiencies gained through technology and automation; and increasing demand-side opportunities to sell insurance,” writes Kate Stillwell, founder and CEO at Jumpstart Insurance.
To drive customer interest in parametric insurance, insurers will need to educate consumers about how parametric coverage works and how it benefits them or their business. For all the chaos it has caused, the COVID-19 pandemic has also created an opportunity in the form of customers looking for new ways to make sure their businesses are protected from disruption.
Parametric policies for disease outbreaks existed prior to the start of the COVID-19 pandemic. Unfortunately, it took a pandemic for most businesses to realize the value of parametric policies for disease outbreaks.
Parametric policies for pandemics or disease outbreaks typically fall into one of two categories depending on how coverage is triggered, writes Vaasavi Unnava at the Yale School of Management. Some policies rely on statistics gathered by a third party, such as deaths from a particular disease outbreak registered by the World Health Organization. Others use civil authority parameters, like a declared state of emergency, to trigger payment under the policy.
“Civil authority triggers provide a strategy to account for non-physical damages, which most business insurance policies do not currently include in their coverage,” writes Unnava.
Many courts have found, for example, that state shutdown orders closing non-essential businesses due to COVID-19 did not trigger business interruption coverage under conventional policies. A parametric policy that specifically accounts for these types of shutdown orders, however, would offer coverage in the event that a customer’s non-essential business was forced to close to slow the spread of an illness.
Parametric insurance products like Marsh’s PathogenRX provided such coverage, yet PathogenRX saw little interest pre-pandemic, says Marsh Alternative Risk practice leader and Senior Vice President Peter Lacovara. It wasn’t until after COVID-19 became an issue that businesses began reaching out to Marsh to discuss its parametric coverage for disease outbreaks.
While purchases of such coverage won’t address losses that have already occurred, they can be valuable to businesses that are susceptible to the fallout of public health and other crises. A policy that focuses on protecting businesses in the case of a government order to shut down, for instance, can help businesses stay afloat even if no physical damage is caused to the business’s property.
Currently, parametric insurance policies can be difficult to sell because customers know very little about these types of coverage. A customer who doesn’t know that parametric coverage is an option, much less how it works, will not seek out such a policy and may be quite skeptical about its benefits.
“With individual businesses, it becomes harder [to sell parametric insurance] because you need to raise awareness about the product,” says Matt Junge, head of property solutions for the U.S. and Canada at Swiss Re. Educating consumers becomes an essential first step, offering a way to build a relationship while also equipping customers with the knowledge they need to consider parametric coverage.
One way to encourage customers to focus on parametric insurance options is to highlight the ways in which this coverage can provide faster payouts in situations where the need for immediate cash is urgent, write Greg Mader and Jason Dunn at Munich Reinsurance America.
Traditional coverage often involves a gap between when a loss occurs or a claim is filed and when the insured receives the funds they need to rebuild. This time is typically spent determining what the customer’s losses actually are. When coverage is triggered by an event like an emergency declaration or specific weather hazard, however, payments can be made much more quickly, allowing the insured to focus on getting back on their feet.
Another way to encourage customers to embrace parametric policies is to focus on how these policies can address losses that traditional insurance does not cover.
“Loss does not stop with direct property damage and the resulting business interruption,” says Head Parametric Natural Catastrophe at Swiss Re Corporate Solutions Martin Hotz.
It’s also important to ensure that a parametric policy’s payouts fit the customer’s needs at the time of loss, according to The Center for Insurance Policy and Research at the National Association of Insurance Commissioners. When customers suffer losses that aren’t covered by the policy, they are likely to abandon the relationship in favor of coverage that focuses more specifically on their losses. Conversely, customers who suffer little in the way of loss but receive substantial payouts do so at the insurer’s expense.
In many ways, the time is right for parametric property and casualty insurance coverage. The rise of big data and the proliferation of insurtechs focused on data analysis allow insurers to write more effective, targeted parametric coverage. Customers who found themselves disappointed by traditional coverage options during the pandemic are ready to consider new ways to address risk. By educating customers, insurers can market parametric coverage more effectively.
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