Parametric Insurance – could you benefit from this insurance innovation?

Parametric Insurance policies represent a somewhat exciting and significant change to the insurance world.

What is Parametric Insurance?

Parametric Insurance is a method of risk financing linked to the severity of a particular loss scenario, which pays out to the policyholder on the basis of a claims “trigger”, irrespective to the extent of the policyholder’s financial loss.

A Parametric policy will link to a specific form of loss such as weather-related incidents like a storm, flood, travel disruption or IT system disruption. For the concept to work, insurers must have quality data on risk severity and likelihood. The policyholder then just selects a claim “trigger” from which the policy premium is calculated.

The need for quality data makes technology crucial to the concept. The name “parametric” comes from the fact that it is based on statistics; the probability of a loss is calculated in the extent to which it deviates from the norm (i.e. parameter). The internet provides access to data, as well as catering for the necessary manipulation and analysis of it, making Parametric Insurance an innovative solution to financing risk. The US was home to the first of these policies in 2016, where National Catastrophe risks such as hurricanes, floods and earthquakes are typical claims scenarios.

This emerging area of insurance gained momentum during the Coronavirus pandemic: most policies excluded COVID-19 losses, and those covered may have waited months for settlement. The Parametric Insurance concept has an appeal here, because:

1. Cover may be available for risks considered uninsurable or unattractive by the conventional insurance market
2. Claims settlements are immediate, not delayed

Parametric insurers are also backed by conventional risk carriers such as the Lloyd’s insurance and the reinsurance markets, meaning that, although the names of parametric insurers are relatively new, you can rest assured by their solvency rating and claims paying ability.

Why is Parametric Insurance different?

1. The vast majority of conventional insurance policies are based on the principle of indemnity (leaving the insured in the same financial position as they were in before the loss), which means that the insured cannot profit from any claim and also that the extent of any loss needs to be proven before it is paid out by the insurer. A Parametric policy does not require a loss to be demonstrated or indeed proved and therefore claim payments can, in theory, be instant as they are often simpler and quicker to deal with.

2. Whereas conventional insurance policies may cover a range of loss scenarios, parametric insurance covers just one.

3. Generally, the conventional insurance market insures the full value of the subject matter at risk; parametric policies are usually arranged at much lower levels of cover.

Examples of UK Parametric Insurance policies and providers

Flood Protection

FloodFlash is the first parametric flood insurance available to the mass market.

A meter fitted to the insured’s premises provides early identification of the rising flood water. The policyholder has already selected a water level at which the policy triggers a payment. The loss payment is also pre-selected, and these two elements (plus the risk address) dictate the premium cost. If the water level is reached, the claim is paid to the full policy limit, irrespective of the extent of the insured’s loss.

Travel Disruption

Blink Parametric is a Parametric as a Service (PAAS) InsurTech, focussed on a flight disruption travel insurance solution to prove its parametric platform.

Policies are available for flight delays and lost baggage and set amounts are paid out for these loss scenarios. Blink also offer other areas of cover such as Business Interruption.

IT Downtime

Parametrix provides insurance protection against potential downtime events such as cloud outages, e-commerce downtime, payment failures, and other disruptions from SaaS, PaaS, and IaaS platforms.

The loss scenario, as the name suggests, is a disruption to IT and covers companies who rely on third-party cloud providers, e-trading capabilities or online payment providers. The claims trigger is the amount of downtime caused by the disruption.

Transaction Volume Protection

OTT Risk provide a policy which covers a range of retail businesses against a reduction in business activity. Examples of claims triggers can be:

• Reduced footfall
• Reduced credit card transactions
• Reduced passenger volume

These wordings would be triggered, for example, by another lockdown following a new pandemic.

In Summary

Parametric Insurance is not a competitive alternative to conventional insurance but it is a useful addition to the range of risk financing methods available. These forms of policy cover are likely to expand into new areas and the exciting possibility is in using them to achieve blended risk solutions alongside conventional insurance.

If you would like more information on the solutions above to explore how they may be able to benefit you, or would like a thorough review of your business insurance, please contact our Commercial Insurance Team; you can call us on 01653 609151 or email us at commercial@mcclarroninsurance.com. If you’d prefer, you can fill out the form below.