Parametric insurance: An alternative to classic insurance covers

Escalating natcat perils are combining with shifting market dynamics to create a complex environment for risk managers. Insurance prices are rising, while the scope of cover is often diminishing. Against this backdrop, we have seen growing interest and uptake of parametric products.

If there has been one constant over the past couple of years, it has been uncertainty. The pandemic has added another layer on top of a constantly changing and increasingly hard insurance market. Escalating perils from natural catastrophes are combining with shifting market dynamics to create a complex environment for risk managers. Insurance prices are rising, while the scope of cover being offered is often diminishing.

Against this backdrop, we have seen growing interest and uptake of parametric products alongside traditional insurance packages.

These bespoke parametric products are tailored for individual clients and provide certainty against specific events. This often allows cover for events or risks which could not be bought on the open market or that were previously deemed ‘uninsurable’. 

The speed with which claims are paid out is another attraction. Parametric products are set up with clearly defined parameters based on, for example, the strength of an earthquake, or wind speed. So, when an event occurs that breaches the agreed level, pay-outs are made quickly – normally within 30 days – since there is no lengthy claims process needed.

An added bonus to buying cover for specific risks through parametric products, is that it can make general insurance packages simpler and more efficient.

Businesses are increasingly looking at their risk exposure through a new lens – certainly the pandemic has shown how far-reaching catastrophes can be. Many are keen to supplement their existing cover and seek a level of security for damage beyond the physical where they are particularly vulnerable. The increasing prevalence of natural catastrophes, driven by climate change, is one of the main drivers for risk managers to reconsider their options.

It means they can offset the risk of exposures in areas like the hurricane-prone Caribbean and US, or Japan where earthquakes are a frequent problem.

However, outside of France, there are more and more examples of governments turning to parametric insurance to mitigate the risk to public assets. For example, the state of Utah has ongoing parametric earthquake cover. So, when a 5.7 magnitude quake hit the Salt Lake City area in March 2020, the state received funds less than four weeks after the event. This was vital in helping them cover the initial expenses associated with the event, particularly given the economic damage already being wrought by COVID-19.

Huge advances in technology and data collection are making parametric insurance ever more attractive. High-quality, granular data means we can track events better than ever before. And it is also helping improve our understanding of perils. This makes pricing risk more possible and the case for mitigation measures clearer.

For example, Swiss Re’s FLOAT product uses drones to capture highly accurate, location-specific elevation data which can be transformed into a visualisation of a facility. Through interactive simulations it is possible to see potential vulnerabilities to flooding and predict flood-related damage.

FLOW is another product born from precision data. It is an index-based water-level insurance, aimed at companies exposed to river levels in Europe. Clients pay a premium based on their individual exposure to water level fluctuations and receive a pre-agreed pay-out when threshold levels are passed. It was initially established in the wake of severe droughts in Germany in 2018, with low water levels affecting businesses like river tourism, transport and freight. It can just as equally be applied to flooding, which could affect nearby road and rail transport, for example.

Getting on the front foot and understanding all your vulnerabilities is the first step to better risk management in this tricky market. And armed with this knowledge, parametric insurance may well be the tool you need to face the future with more certainty.

Get in touch with us today to learn more about our alternative risk transfer solutions that go beyond traditional insurance.

The article was originally published in French by Atout Risk Manager.