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DEALING WITH VALUATION ISSUES UNDER THE INDEMNITY PRINCIPLE
has been. This can, at times, slow down the payment process and thereby somewhat dampens one of the key benefits of parametric cover. The element of indemnity may also have an impact on how a product is classified, regulated and taxed. The UK Law Commissions note that the main difference between parametric insurance and derivatives seems to be that parametric insurance contracts usually require at least some nominal element of loss before the policy will pay out and that often insurers will require the insured to provide a sworn proof of at least some actual loss. In South Africa, where parametric insurance is being actively encouraged by a government mandate to provide financial services to the commercial farming sector and to agri-business, an insured must prove they have suffered a loss and that they have an insurable interest in the loss to avoid the cover being classed as a derivative product and regulated as such. Unlike in India, however, insureds in South Africa are not required to quantify the extent of the loss before receiving a payment, merely to prove that some loss has been suffered.
English lawhas long recognised the concept of valued policies whereby the insurer agrees to pay a fixed sum once the loss is established, without a need for further adjustment or valuation at the time of the loss. However, the indemnity principle can potentially create regulatory and legal challenges in jurisdictions where codified insurance law does not traditionally permit ‘contingent contracts’, requiring instead that any losses are subject to valuation. In India there has been relatively widespread take-up of parametric products particularly covering agricultural risks such as crop failure due to drought or flood. For example, a number of the larger multinational insurers including AIG, Sompo Canopius and Tokio Marine – in conjunction with their Indian partners – have come together under the umbrella of the Agriculture Insurance Company of India Limited to offer parametric solutions which are generally purchased by farmers as a requirement of their lenders. However, because of Indian regulation and law around contingent contracts, the insured needs to prove to the insurer what the loss
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