Probability vs. Indemnity

Parametric insurance has become an increasingly popular option to complement traditional indemnity insurance products and provide new coverage options made possible through better datasets and forecasting.

November 16, 2021

DRC looks forward to the Wholesale & Specialty Insurance Association (WSIA) Annual Marketplace beginning tomorrow, November 16th at the Marriott Marquis San Diego Marina. The event will be the second of three we will be attending in person as we approach the end of the year.

One event of special interest at this year’s marketplace will be the education panel on Nov. 17 on parametric insurance. Barbara Ingraham (Verisk Insurance), Alex Kaplan (Amwins Group) and Daniel Vetter (Descartes Insurance Solutions, Inc.) will serve as presenters.

Parametric insurance provides coverage for customers when triggered by specific, predefined events. Rates depend on the probability and magnitude of the event, rather than set by covering losses actually incurred. An independent third party or government agency measures whether an event triggering coverage occurs. For example, the National Earthquake Information Center can report the size and location of an earthquake. Parametric insurance isn’t a substitute for traditional indemnity insurance but a supplementary form of coverage to fill gaps created by deductibles, excluded perils and retained risk.

The National Association of Insurance Commissioners noted that parametric insurance is a favorable option because policies are paid out faster. Policies provide relief for specific occurrences, obviating any need for a claims adjustment process. When the event triggers, money goes straight to the policyholder regardless of the actual loss, if any at all. Those seeking coverage with parametric products can cover pure financial risks like contingent business interruption while insurers offering the coverage enjoy lower transaction costs and even reduced risk of fraud in the event of a claim. Settlement is transparent, painless and swift.

“Since parametric insurance is customized to each real estate portfolio’s unique risks, it allows building owners and operators to set the terms and conditions for payout,” Law.com’s Daily Business Review explains. “Because parametric policies are highly customized, real estate owners and operators will want to work with their broker to help set up optimal parameters for coverage.”

There is no “standard” coverage for parametric insurance and each policy offers bespoke, completely customizable coverage based on the client’s needs and the index selected to determine the event triggering payout. Moreover, coverage can be single trigger or multi-trigger, offering an agreed-upon payout if an initial magnitude event occurs (e.g., 7.5 magnitude earthquake) with additional payouts for greater severity (e.g., 8.0 magnitude aftershock).

”Parametric Insurance has been a hot topic at the last few shows due to the interest in finding alternative pricing for the major catastrophic events that keep risk managers up at night,” noted Robert Whitton, DRC’s VP of Sales and Business Development. “DRC has been watching this market closely for the last few years, and provides support for pricing named catastrophes in our RS X Rating Engine as well as processing support for quoting/binding and servicing these unique contracts.”

Parametric insurance isn’t entirely new, but better (and big) data has furnished additional areas and opportunities to provide coverage when events occur vs. when a loss is experienced. Innovative insurers are leveraging digital platforms to enable more efficient, faster, more scalable solutions that meet the ever-evolving needs of insureds in an increasingly uncertain world.

To learn more about DRC’s policy processing for parametric products, contact sales@decisionresearch.com.