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Emerging trends – parametric insurance

Natural catastrophes have presented new challenges to insurers, with economic losses from natural catastrophe’s reported in 2020 close to USD200 billion, of which USD81 billion were insured. The solution to transfer risk of such events as against indicia as distinct to satisfying policy definitions makes for clearer indemnification and certainty in the payment of claims. There are a range of applications where this method of risk transfer may be applied, particularly to natural disaster exposed assets and industries.

What is parametric insurance?

Parametric solutions are in their most simple form agreement to pay which is triggered using a parameter (or metric or index) measurable to a particular exposure.

For example, if an earthquake of x magnitude occurs in the defined area of cover a payment of $x will be made to the purchaser. The index and payment can be set on a sliding scale to adjust for severity. As such for the Insured to be paid under a parametric policy there is no requirement to prove loss or damage, only for the conditions to be met.

Pricing

The trigger for coverage to apply must be independently measurable and easily to be modelled by insurers. By way of example, weather data has been captured and recorded by authorities for decades and can be accessed and modelled by Parametric providers.

In terms of pricing insurers will be more transparent in the way they have priced the risk being purchased and the data is easily understood – brokers should be able to clearly articulate how pricing has been determined by looking at the risk of payment in each year which will reflect the premium charged.

Application and evolution

Parametric solutions are not designed to provide “all risk” property insurance cover. They are used to plug holes in program where particular exposures are uninsurable or prohibitively expensive to insure. They can also be used to provide economic protection from weather events on construction sites where heat and rain delays can trigger liquidated damages under contract.

We consider parametric risk transfer solutions will continue to evolve over time – already policies have been taken out for business interruption losses arising from non-weather events. This is only possible where data on the exposure can be independently obtained and modelled by insurers.

Insureds will need to seek out brokers who understand how parametric products can provide an alternative to traditional risk products particularly where undesirable weather peril exposures exist.

Bellrock can provide assistance around such placements and insight as regards to the suitability of parametric solutions to their particular risks.