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Why Parametric Insurance?

Typhoon Hurricane over Earth

Parametric insurance is not wildly known about. Its one of the many insurance industries best kept secrets. However it is becoming a more used terms these days because of the focus on Tech and customer services.

Parametric insurance can be very attractive to groups, individuals and even companies. It offers to pay out on given triggers (or parameters) and then the ‘insurance’ is paid out on that basis.

Parametric insurance uses third parties and independent agencies to measure the triggers and when limits are met or events occur then the insurance is paid out.

In conjunction with Crystal & Co and Axa, we have launched our first parametric insurance this year, in May 2018. This is a parametric insurance product aimed at hurricanes in Florida.

Let’s say a company wants to purchase hurricane insurance. The traditional model in which, say, a hurricane hits and then the insured party has to tally up the losses and submit a claim for damages under the terms of the insurance and lets say 50% of the damage is caused by wind damage and 50% by flood damage then the policy for hurricane will only pay for the wind damage. This process can take a long time and is very costly.

With parametric insurance there exists a pre-specified agreement between the two parties (the entity taking out the policy and the insurance carrier) about what constitutes a hurricane in the first place. They may agree that if winds are sustained for 1 minute at 80 miles per hour within 20 miles of the address location – that is a hurricane which would trigger a payout for the insured.

With hurricane parametric insurance this is measured in real time and monitored. The hurricane is tracked, and the location of the insured are known. Simple.

One advantage of parametric insurance is that this model allows claims to be paid much more quickly than do traditional policies. Once the parameter is set and then passed, the agreed upon sum is paid out, with the policyholder only having to pass a simple process to quantify its losses.

Parametric insurance could offer policyholders in insurers better efficiencies because the cause-and-effect nature of triggered payouts obviates the need for assessors, arguments, protracted claims, plus the time and effort needed to tally up what was lost.