What Is Parametric Insurance?
Unlike traditional indemnity-based cover (which pays claims based on the assessed magnitude of the loss), parametric insurance pays a set amount following the occurrence of a specific event within the covered radius, based on the magnitude of that event. The parametric method simplifies the claims process, removing the need for lengthy investigations and costly legal disputes and facilitating a fast claims payout to policyholders when they need it most.
For example: If a Hurricane travels through the pre-established covered radius on a policy, the payout may trigger as soon as the track of the hurricane is reported by the National Weather Service to have come within the agreed distance from the insured property.
What Can Parametric Insurance Cover?
Parametric policies typically provide coverage for a single weather or natural catastrophe peril, such as tornadoes, hurricanes, wildfire, or earthquakes. However, coverage is also available for non-damage BI scenarios such as drought. In fact, parametric covers are available for almost any type of event which can be linked to an independently verifiable, third-party data source. Parametric triggers may include wind speed, rainfall, snowfall, earthquakes, wildfire, hail, days of sunshine, temperature and agriculture yield to name a few.
Consider the following scenarios:
- A car dealership can’t find coverage for damage due to hail, despite having to store the majority of their stock in hail-exposed outdoor parking lots. They choose to cover a portion of their stock value with a parametric hail policy.
- A ski resort needs a certain amount of snow to open for business. The resort buys a parametric insurance policy that pays if X inches of snowfall does not occur by a certain date.
- A wheat mill depends on a large crop yield. If the crop yield is lower than expected, the government may pay the wheat farmers a subsidy, but other businesses like mills that support the agricultural industry may not qualify. The mill takes out a parametric insurance policy that triggers if the crop yield is below a threshold.
Other triggers are also possible, depending on the needs of the policyholder. For example, a company could explore parametric coverage to protect against cyber downtime, acts of terrorism, active shooter scenarios, or travel cancellations. Coverage is possible for nearly any large exposure.
Who Needs Parametric Insurance?
Parametric insurance is suitable for businesses with significant risks that traditional insurance excludes or may not adequately cover. The typical premium threshold is $100,000 for any single opportunity.
How Does the Underwriting Process Work for Parametric Insurance?
Although parametric insurance streamlines the claims process, the quoting process may take longer than indemnity insurance. Businesses should start the process well in advance of when they need coverage.
Furthermore, terms are generally open for 30 days because of the limited number of carriers offering coverage for certain perils in a geographic area. Quoted terms may be withdrawn with short notice when they hit their coverage limit. For example, if you need wildfire coverage for your vineyard but all the neighbouring wineries have already purchased coverage, the carrier may have reached its aggregate limit and be unwilling to provide any more coverage in the area. Additionally, rates may increase as the season approaches. For these reasons, it’s important to begin the process as early as possible.
Businesses interested in parametric coverage need to supply the necessary information, including the following:
- Name of the Insured
- Risk Location
- Total Value of the Asset/Portfolio
- Limit to Be Insured under the Parametric Policy
- Target/Budget Premium
- Loss History
- Confirmation of Acceptability by Client/Lender