Parametric insurance

Parametric insurance: A tool to speed your disaster recovery

The past few years have taught us some major lessons in the volatility of our planet. More than ever, we’re searching for insurance coverage related to climate change risk, natural disasters, health crises and political unrest. And parametric insurance is emerging as a game-changer. It transforms the uninsurable into insurable, long-drawn-out processes into trouble-free, and confusion into transparency.

If you’re looking to mitigate your risk, parametric insurance could be a game-changer. But how exactly does it work? And how does it differ from traditional insurance solutions? Let’s dive right into it.

What is parametric insurance and why is it gaining interest?

Parametric insurance is here to fill a gap that long-standing insurance products were once unable to fill. Compared to a typical insurance claim which compensates for harm or loss, parametric insurance pays out a pre-agreed amount based on a ‘triggered’ event using objective data sets. It covers the probability of a predefined event happening and pays out an agreed amount. The outcome? Claims are settled quickly, the pay-out is certain, and it allows the customer to plan ahead.

The quick deployment of claims is a key point of attractiveness for many — helping to speed recovery and minimise business and domestic interruptions.

The growth of data analytics and remote sensing technology has turned parametric insurance into a powerful weather risk mitigation tool. But it doesn’t stop there. Once limited to weather-related disasters, policies are now making great strides into cyber-terrorism, political unrest, pandemic, warfare, global economic downturn and much more.

How does parametric insurance work?

Parametric insurance is elegant in its simplicity. Any external event can be covered, as long as you have no control over it, and independent data concerning the event exists in the public domain (for example, wind-speed data or infection rates). If such events would have an impact on your business or property, you can insure against them using a parametric solution.

Thresholds are agreed in advance and are based on independent data sources such as, in the case of a Tropical Cyclone, the Australian Bureau of Meteorology.

Events often refer to an index-based trigger or an event within a defined area. For example, the policy might be structured to pay out 75% of a predefined limit for a Category 4 cyclone occurring within a 50-kilometre radius around your point of interest.

The process can be broken down into three simple steps:

Parametric Insurance process
Key advantages of parametric solutions

Parametric insurance solutions can provide you with some important advantages compared to traditional cover options, including:

  • Closes the coverage gap: By addressing gaps in the cover such as non-damage business interruption, normally excluded assets, loss of attraction and prevention costs, parametric solutions complement rather than replace traditional insurance products.
  • Speed and efficiency: Parametric triggers can aid disaster recovery thanks to a simple and quick pay-out process that provides liquidity when you need it most. The pre-agreed pay-out means that claims are processed quickly and efficiently, with minimal paperwork required, no lengthy claims investigations and no disputes.
  • Accessibility for more: It serves a broader range of needs, especially those in remote or high-risk areas. Those in areas hit by a catastrophic event, such as bushfires, in the past often find it difficult to get cover on a traditional policy as the risk involved is considered too high. By insuring against the likelihood of an event happening as opposed to actual damage caused, parametric insurance reduces the cost and uncertainty for those who have previously been excluded.
  • Greater transparency: Independent third parties provide the data needed to trigger payment based on a simple, individually verifiable, and unambiguous process. This information can be accessed immediately after the event.

The future of parametric insurance in Australia

To Australian businesses, parametric insurance products are specifically attractive for several reasons. As the criteria is objective and measurable, these products allow insurers to service remote locations and increase the speed of claims payments compared to traditional insurance products in which the loss would have to be proved by the policyholder.

With the large geographic distribution of population and risks in Australia, and areas that are susceptible to increased risk consequent to climate change, the advantages of parametric insurance products are set to drive substantial growth for these products in Australia.

Although still in its infancy, its possibilities are being realised more and more. Parametric insurance is likely to show strong growth over the coming years, fuelled by advances in data science, Artificial Intelligence (AI) and robotics.

Talk to an expert

At Western General Insurance, our expert brokers work closely with you to provide parametric products that you can rely on. We help our clients to bounce back into action faster, free from unnecessary trouble. Contact us to find out more.