The challenge for today’s slow-moving insurers is to offer coverage for a fast-changing risk environment. One of the innovative solutions is parametric insurance. Also referred to as index-based insurance, parametric insurance is filling the gap left by traditional insurance products. Parametric policies pay out when a defined “metric” or event occurs in a specified location, such as wind reaching a certain speed.
What is Parametric Insurance?
A parametric insurance policy pays out a pre-defined amount only when an event happens, regardless of any damage that occurred.
Therefore, the amount paid out is based on the strength of an event — wind speed, earthquake magnitude, and water levels being the most common cases.
However, you can also insure yourself against non-weather events such as business interruption caused by issues in the supply chain.
The Structure Of A Parametric Policy
There are two necessary components: a triggering event and a payout mechanism. These two elements establish the scope of the policy, set the price and conditions under which the customer receives compensation.
There is also a third element: a neutral third party, which provides all the relevant data about the event. This does away with any possible conflicts of interest and is a necessary component of every parametric policy.
Many insurance companies use The National Oceanic and Atmospheric Administration as an independent third-party agency.
So, once the event is validated by the third-party source, the payment is automatically made. This way the insured party can enjoy a fast claims process.
The United States Requires Proof-Of-Loss
Insurance carriers in the United States should know that regulators require the occurrence of actual physical damage before the insured can receive reimbursement. This is to distinguish parametric insurance from speculation and gambling.
Benefits of Parametric Insurance
While parametric insurance policies may still be in their infancy, their ability to deliver automatic payment in a data-driven world gives them a competitive edge over traditional indemnity.
Prices that Are Competitive
In traditional insurance, pricing the risk of a loss is very challenging. Frequently the price set by traditional indemnity is too high for potential clients. In addition, the slow payout mechanism also makes traditional policies unappealing.
Also, the insured party typically has more accurate information regarding their own risk than the insurance provider. Parametric solutions remove this asymmetry. Both parties have access to the same relevant data about the likelihood of an event occurring.
Innovative Insurance Products
Traditional insurance products typically use standardized wording. In contrast, a parametric insurance policy is a customized product. The phrasing represents the client’s particular needs, in line with their own risk assessment.
Parametric products are flexible — insurers can issue policies that can be valid for a couple of months to several years.
Also, insurance carriers can design parametric policies that payout 50% of a pre-defined limit for a Category 3 hurricane and 75% for a category 4 hurricane.
In other words, customization options are virtually limitless.
Immediate Payout for a Better Customer Experience
While determining actual physical damage with traditional insurance products tends to be both complicated and lengthy — oftentimes it takes weeks to settle — parametric insurance pays out in days.
As a result, policyholders don’t have to spend their own money or get a loan to fix damages while they wait for reimbursements.
Offers Help When It’s Needed
Instant payments are critically important for victims of natural disasters. Organizations tasked with disaster response benefit from receiving funds quickly since resources can be deployed immediately. Instant availability of funds enhances disaster response and lessens losses.
Launching Parametric Insurance Policies with Rules Engines
The need for niche parametric insurance products continues to grow.
Creating parametric policies that comply with all the relevant regulations while still attracting buyers often involves several departments. This is why leading insurance companies use business rules engines to deliver innovative products on the fly.
Rules engines give insurance underwriters a comprehensive overview of all the processes, boosting collaboration from various team members.
A business rules engine cuts the development time of innovative parametric insurance policies down to minutes, allowing insurers to immediately respond to market changes.