What could the future hold
KEY FACTORS FOR SUCCESS
loss experience. Such accuracy will build trust for these innovative products (and the insurance industry more generally) where insurance penetration is traditionally low. Mixed or hybrid models with parametric and indemnity elements combined are available and can assist in building regulatory trust, particularly where there is a strong indemnity principle under local law and losses must eventually be quantified or evaluated. All parties involved with parametric products must understand how the cover works. Clarity and communication with the buyer, and with regulators and others will ensure that parametric products build a name for themselves and fulfil their promise in improving global resilience.
With the potential of parametric insurance clear, the appetite proven and products already in the market and working on a government backed and commercial basis, what, bearing in mind the legal and regulatory issues raised in this paper, are the key factors for success?
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Basis risk will need to be mitigated through careful and accurate modelling. Product design, wording and careful consideration of alternative scenarios, captured in contractual terms are vital. A key part of modelling is accurate and reliable local information and know-how to conform the triggers and calculations of pre-modelled loss as closely as possible to actual
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