Although Parametric Insurance has been around since the 1990s, increasingly difficult market conditions and recent advancements in underwriting technology have caused a surge in popularity. The concept of parametric insurance is straightforward. Unlike indemnity policies that pay claims based on the insured’s actual losses as determined by a loss adjuster, parametric insurance claims pay out a predetermined amount based on the occurrence of a specific ‘trigger’ event, such as a hurricane or flood, that:
Parametric insurance claims are paid quickly – often in just a few days. This is because the payouts under these policies are tied to the occurrence of the trigger event, which eliminates the need for adjusters and settlement negotiations. The insured also has the freedom to use the claims proceeds in any manner related to the damage or interruption to the business caused by the trigger event. The combination of rapid payouts and flexibility around how claims proceeds may be used can help organizations recover more quickly after a catastrophic or disruptive event.
In addition to a swift claims process, payout amounts are defined in advance as part of the policy design, so there is no ambiguity. Parametric insurance, also known as ‘index-based’ insurance, is structured with a payout index. The index ties the payout amount to the severity of the trigger event relative to the organization’s business continuity plan and risk tolerance. Below is a hypothetical example of how a policy with a hurricane trigger might be structured.
Verifying Source: National Oceanic and Atmosphere Administration (NOAA)
| Within 40-mile radius: • Latitude: 25o 45’ 27.48” • Longitude: 80o 11’ 37.32” | ||
In this example the organization was confident it could withstand and/or absorb all of the damage and disruption from a Category 1 hurricane and most of the damage and disruption caused by a Category 2 hurricane. So, the policy payout scheme was structured accordingly.
Parametric coverage does not have to be limited to the insured’s location. It can be designed to provide coverage for trigger events that occur within a pre-agreed distance from a “point of interest”, typically defined by a specific latitude and longitude. This approach, sometimes referred to as “Cat in a Box”, provides protection for trigger events beyond the insured’s immediate location that could interfere with infrastructure or activities critical to the organization’s operations.
With climate change contributing to the frequency and intensity of storms, wildfires and flooding events, natural disasters will continue to be common parametric insurance coverage triggers. However, parametric insurance policies are not only for large natural disasters. This type of coverage is becoming increasingly popular for covering a wide range of disruptive trigger events, such as:
There are a multitude of risks that can be covered by a parametric policy. The fundamental requirements are that the trigger event must be a:
Parametric insurance is not intended to replace traditional indemnity insurance. However, as a complement to traditional coverage it offers key advantages including:
When considering parametric insurance, it’s important for organizations to partner with a broker that has deep knowledge in this coverage category and the ability to evaluate how it may support protection needs. Conner Strong & Buckelew has the in-house expertise to identify an organization’s specific exposures and determine whether parametric insurance can strengthen its overall protection strategy. And if parametric coverage is a good fit, we can leverage our relationships with the top parametric insurance carriers to help secure coverage designed to meet the organization’s unique needs.
For more information on how our team can help, please reach out to your Conner Strong & Buckelew representative, call us at 1-877-861-3220 or email [email protected].
Tim Svoboda, CPCU, ACI, ARe
Vice President, Captive Consultant
