17
Legal considerations
If parametric risk transfer solutions are to move from niche to mainstream status as part of (re)insurers’ offering in territories around the world, regulators will need to be on side. Even though parametric insurance has an established track record in many countries, some regulatory and legal uncertainty remains. Parametric insurance products are novel and may not be addressed by statute. Regulatory frameworks that might exist in this area are usually not firmly codified and remain largely untested. In common law jurisdictions, case law has yet to be established that would inform understanding of how these types of policies will operate, be classified for regulatory purposes and be legally enforced.
Under English law, insurance is a contract whereby for consideration one party promises to pay another if a specified event occurs that is adverse to the interests of the insured. There is nothing within this traditional definition to preclude a contract based on a parametric trigger – the agreed parameters would simply be the arbiter of the “specified event”. Parametric insurance products may cause legal or regulatory uncertainty in jurisdictions where: the insured must have an ‘insurable interest’ at the time the policy is underwritten and/or at the time the loss occurs. the size of the insurance pay-out must correspond to the actual loss suffered by the insured. This ‘indemnity principle’ can mean that in certain jurisdictions, an insurer may only restore insureds to their pre-loss financial position, such that losses must be valued or assessed before claims can be paid. 1. 2.
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