How to save money with parametric insurance

Saving money with parametric insurance? This is obviously a very bold statement. Borderline clickbait. Perhaps you should not expect to save money with parametric insurance, when compared to traditional insurance. Or should you?

To be clear: as a buyer of parametric insurance, saving money should not be your main motivation. Parametric insurance can have many positive qualities. It is undeniably fast. It is transparent and provides you with great contract certainty. And it is flexible, so it can fill holes that exist in traditional insurance policies, for example around business interruption (including non-physical damage business interruption and contingent business interruption.)

One dilemma when comparing the price tag of traditional insurance with a parametric alternative therefore is: They are two different products, with very distinct features including a different cover scope, so the comparison will never be apples to apples. Whichever apple variety you prefer – the inside should live up to its promise.

Slogans like "buy parametric and save money" should generally cause you to be suspicious of the offered value. While it can be a powerful tool, parametric insurance cannot do wonders and defy the laws of mother nature. The underlying events covered – be it earthquakes, or hurricanes – occur with the same frequency, regardless of if you're purchasing parametric or traditional insurance. Beating a defined price target too often works via the provision of unfit-for-purpose parametric structures, with either only extreme events being covered or with the solution so tailored to one very recent event that other disruptive, high-impact events are left uninsured. Is this shiny cheap apple really the one you want to sink your teeth in?

Now, there can indeed be situations where parametric insurance saves you money. How so?

  1. Parametric insurance is fast and provides liquidity when you need it most. It pays out in the days and weeks after an event, as opposed to months and years. There's tremendous value in the fact that claims settle in the same accounting year.  There is no waiting for proceeds as post-event losses pile up. So parametric insurance will save you money after the covered event occurred.
  2. Parametric insurance is transparent and provides you with great contract certainty. There are no external loss adjustment or legal fees to cover. Again, parametric insurance will save you money after the covered event occurred.
  3. And lastly, parametric insurance is flexible. It covers for all types of loss, far beyond property damage and resulting business interruption. This cover scope simply cannot be matched by traditional insurance – or rather: traditional insurance featuring the same broad cover scope, would have to cost much more. Again, parametric insurance will save you money after the covered event occurred, as the proceeds can be used to cover otherwise excluded types of loss – rather than having to pay it out of your own pockets or take out high-interest loans.

So, to sum it up, parametric insurance offers great value for money. And it may even save you money, when factoring in that there's more to the money equation than the bare premium figure.

Learn more on our parametric solutions and contact us today.