Parametric insurance is a newer product gaining popularity among consumers in the marketplace. It has several interesting use cases and is growing within the risk and insurance industry. Because of this, agents and brokers should know about parametric policies and how they can complement traditional insurance coverage.
Read on to learn more about parametric insurance coverage and how it works with traditional insurance coverage.
What Agents Should Know About Parametric Insurance Coverage
You may have heard of parametric coverage, especially in relation to weather and travel. Parametric coverage is a transparent, simple type of policy. A parametric policy is triggered by an event happening — the insured doesn’t need to suffer a loss or any damages from the event to be paid.
When a policyholder buys a parametric policy, they and the insurer agree on the triggering event and amount of coverage. Then, if the event happens the policyholder is paid. It is straightforward — the insurance company doesn’t need to investigate the loss and the insured doesn’t need to prove any damages or even file a claim. The fact that the event occurred is enough to trigger the policy. Parametric insurance is data-triggered insurance that provides a simple, transparent option for policyholders and so it is gaining popularity among consumers.
Thus, a parametric policy needs an event trigger, a way to prove the event happened, and a mechanism for paying policyholders. It is simple and transparent — the insured knows what they will be paid, how, and under what circumstances. The insurance company can easily set reserves knowing the cost of claims in advance. You can compare the transparency of a parametric policy payout to that of an agreed-value policy. Everyone knows in advance the amount the insurance company will pay if a covered event happens.
Parametric insurance coverage is an excess and surplus lines product. This means it is not regulated by the state insurance or financial departments. Carriers who provide parametric insurance are often underwritten by a major insurer that provides financial stability to the product. But knowing the insurance is not regulated by the state insurance department is an important distinction from traditional insurance products.
Applications of Parametric Insurance
There are several burgeoning applications and interesting use cases for parametric cover already in the marketplace.
- Travel parametric policies are sold to cover flight delays and cancellations. Some policies are written to provide a payout to a traveler if their flight is delayed for longer than a set time period, say 15 or 30 minutes. Other policies offer lounge access or other perks when policyholders are delayed. If the flight delay happens and the length of the delay exceeds the policy’s trigger, the insured gets paid. The insurance company can prove both the length of the delay and the fact a delay happened at all by reviewing the airline’s data.
- Flood parametric policies are a simple way for homeowners and business owners to secure some flood coverage for their property. With flood parametric policies, the policyholder and insurance company agree to two metrics in advance – the depth flooding must reach to trigger a payout and the amount of the payout. Then, if flooding happens and the depth of the flood water exceeds the agreed-on depth, the insurance company issues the payment amount to the insured. Some insurance companies install sensors at the insured property to measure flooding that may trigger the policy payout. These sensors may also use data from sensors installed in local rivers and streams by the USGS.
One of the first parametric insurance companies to begin writing coverage in the US was Floodflash, a UK-based company that recently began offering flood parametric coverage underwritten by Munich Re. Floodflash only offers a commercial policy right now, but the company could expand to personal lines in the future. It may also add more perils in addition to flood, but for now, the company limits its products to flood coverage.
- Some parametric policies are sold to cover extreme weather events, like hailstorms, freezing conditions, blizzards, and rainstorms. Commercial companies, like builders, face risks from these extreme weather conditions. And these weather events can be proven through data, making them a good choice for parametric insurance. Commercial companies purchase parametric weather insurance to help cover losses caused by these extreme weather conditions.
Parametric weather insurance can be used to help cover losses incurred by too much or too little weather. This means losses from a hurricane or blizzard could be insured by a parametric policy — but so could losses from a lack of weather, such as a ski resort suffering from a season without snow. As weather conditions fluctuate for various reasons, parametric insurance improves resiliency.
The Bottom Line
Parametric insurance is growing in popularity. And as insurance companies find more applications to help policyholders bridge the gap and complement traditional insurance products, we will likely see even more consumers wanting to purchase a parametric insurance policy.
Talk with your clients about parametric insurance solutions and how they can complement their traditional insurance coverage. And check out our blog for more trending information you can use to educate and help your policyholders.