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The advantages of parametric insurance
WHAT IS PARAMETRIC INSURANCE?
while for drought and agricultural cover the parameters might be based on satellite images of the colour of the ground or volume and frequency of rainfall over defined periods. Parametric products can cover risks that are not otherwise easily insurable, and allow for more scientific pricing of products that respond to specific isolated parameters, rather than the physical losses which might result from any number of a wide range of occurrences. Together with lower claims management costs, this makes lines of business commercially viable that were not previously. Data is key with parametrics and, as such, new indices based on datasets are regularly being researched and deployed, including from the Internet of Things (IoT). Provided there is a strong enough correlation between the index and the insured’s expected losses, it should be possible to define a parametric solution that offers speed and certainty of payout. Parametric policies are also deployed to build resilience in commercial settings.
Conventional insurance indemnifies the policyholder for the loss it incurs from an insured event. Parametric insurance by contrast pays a fixed amount upon the occurrence of a triggering event. The amount payable can be based on a modelled forecast of the loss that the policyholder will incur. The nature of the product means that no loss adjusting need take place. As soon as a pre-determined threshold has been met, the policy is triggered and payment is made. A parametric trigger can be anything, but is often set by reference to a measure of a catastrophic natural event which might lead to a loss or a series of losses. So, for example, hurricane cover might be triggered by wind speeds reaching a certain pre-agreed intensity in a specified location according to a trusted and verifiable provider of weather data. Earthquake cover might be triggered by seismic intensity, location, depth and radius data;
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