Use cases for data analytics in insurance have evolved considerably in recent years. One of the biggest such innovations is parametric insurance that is steadily rising in importance, with the increasing unpredictability of the world and environment today. Instech reports have already highlighted how parametric solutions saw record growth in 2022 and the trend is set to continue over this decade as well.
What is Parametric Insurance?
Often labeled as climate risk insurance or disaster insurance, parametric insurance can be classified as the following:
Why Parametric Insurance is Beneficial?
Insurtech players have already started realising the value of parametric insurance solutions, particularly for helping communities build financial resilience in the light of unpredictable and volatile climate risks. Some of the key benefits include the following:
Are There Any Disadvantages?
While the advantages of parametric insurance clearly outweigh the disadvantages, there are still a few moot points in this case.
How It All Stacks Up
Parametric insurance is an innovative product that is well-positioned to take-off in the current global scenario, despite its potential drawbacks. Technology will play a vital role in data-based payouts in the future. This will include real-time tracking from ground-based sensors and satellite/radar imagery and data. The aim of the insurance product in this case is to minimise risks as much as possible based on advanced data and technological prowess.
In fact, it can well transform into a more effective and robust climate risk insurance model, thereby incorporating the costs of climate change in a better way. With the certainty of these products, a higher portion of premiums that buyers spend on coverage come back to them as claims, instead of being spent through disputes and frictional expenditure. Parametric insurance is also customisable to various industries and corporate clients, since it is not concerned about the type of asset, rather wider financial losses due to triggering events. Clients in the corporate sector can thus tackle the bigger financial impact on operations in case of climate events, including vendors, suppliers, customers, and logistics. IoT and other new technologies will keep powering parametric solutions, with warning systems that can inform customers about potential risks. This will help them take preventive measures in advance. LLMs or large language models are also positively impacting the sector and will completely change underwriting in the future. They will process vast datasets swiftly, including claims history and historical occurrences, thereby enabling underwriters to predict future claims more efficiently. So, to sign off, it can be said that parametric insurance should be around in the coming decade and even beyond. With more insurance companies, underwriters, customers, and brokers recognising it as a good solution for risk transfer, there will be more evolution into secondary complexities and events like floods, hail, thunderstorms, wildfires, and more. With data being leveraged comprehensively for pricing, this form of insurance will make underwriting easier and lower the time to quote and finalise policies or even settle claims. This will help insurance companies save more time and money, which will prove hugely beneficial in the long run.
FAQs
1. What is Parametric Insurance and How Does It Differ from Traditional Insurance?
Parametric insurance is a form of insurance where payouts are triggered based on certain pre-determined thresholds/parameters. It is different from traditional insurance, since it is not concerned with the actual loss/damage.
2. How Does Parametric Insurance Work?
In case of any event/disaster that triggers any specific thresholds/parameters like wind speed, earthquakes of a certain magnitude, and so on, pre-fixed payouts will be given to policyholders, irrespective of their actual losses and whether they have suffered losses or not. Claims processing will be near-automatic due to pre-fixed agreements.
3. What Are the Benefits of Parametric Insurance for Policyholders?
Communities and people without access to conventional insurance can benefit from higher financial resilience against climate change with parametric insurance. It enables swift payouts and more agile operations, while saving time and resources. It also lowers the chances of disputes with policyholders and fraudulent claims.
4. What Types of Events Are Covered by Parametric Insurance Policies?
Parametric insurance policies can cover a wide range of events including earthquakes, poor crop yields/harvests, natural disasters like hurricanes and cyclones, and so on.
5. How is the Payout Determined in Parametric Insurance?
The payouts in parametric insurance are determined based on whether specific thresholds have been triggered in the case of any event. There is no consideration for the actual loss of the policyholder. If these parameters are triggered, then payouts are released to policyholders and are pre-fixed amounts. These amounts are estimated by policyholders in most cases, depending on their calculations of the potential financial cost of damages due to varied natural disasters and other such events.
