The Promise of Parametric Insurance As concerns of climate change and the global insurance protection gap continue, insurers and reinsurers are exploring ways to allow property owners greater control over coverage. Those in high risk areas are being offered parametric insurance, which allows for reinsurance and insurance companies to transfer risk in an atypical way. “The solutions revolve around a measurable index and are based on predefined triggers or pay out mechanisms – without necessarily needing physical damage to occur,” according to a recent article from MarshMcLennan. Demand for innovative solutions has been increasing just as climate-related weather risks have become more unpredictable and complex. Index-based cover, another term for parametric insurance, is becoming better known and utilised, particularly for weather-related events. As high-impact weather events continue to gain in strength, so, too, are satellites and weather stations able to more accurately capture weather-related parameters in order to improve hazard modelling. “Improved data and models enable parametric cover as an increasingly efficient, affordable and viable option in the market,” according to the article. Energy, power, hospitality, infrastructure, real estate and finance industries, to name a few, are the sectors that are able to harness weather-related indemnity where risks are uninsured or underinsured. What many experts are perceiving is that parametric coverage is also becoming a building block for microinsurance that can prove especially helpful to vulnerable communities. Parametric coverage was not established to replace traditional insurance, but rather to complement/supplement them and increase the speed of recovery.
“They can be designed to cover both specific catastrophic losses and frequency losses – for example the business interruptions caused by a hurricane or the impacts of decreased snowfall,” according to the article. As a result, it is worthwhile to consider how traditional indemnity policies can work with parametric solutions in order to get the best results. Parametric coverage can come in handy when there are losses from business interruptions like when water levels become too low for shipping or when there is limited snowfall in snowdependent areas. While the losses may not be direct, they can still be insured thanks to parametric coverage. Parametric insurance may have uses far beyond climate-related disasters. Advancements in technology are also paving the way for customizable parametric insurance that protects against reputational damage, data breaches and even cyber-attacks. Quantity and quality of data has been one of the biggest challenges to parametric insurances as it has hindered policy coverage design for insurance buyers. “As data innovations continue, the range of available alternative risk transfer options will only grow, as more insurers are willing and able to underwrite parametric deals,” according to the article. This results in increased options as the concept of insurable risk transitions from tangible to intangible “and organizations will increasingly require bespoke and innovative solutions to protect against those intangibles.” As a result, parametric coverage should be considered as a solution for any kind of risk against which an organization can apply an index. Widely regarded as a burgeoning sector of insurance, parametric coverage will become over time more mainstream and a more viable option to help organisations create climate resilience and bolster disaster response and recovery, and further aid in the efforts to close the global insurance protection gap.