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Overview

Parametric Insurance - 2021 Outlook

Introduction

Everything we do is driven by the data and science

Sigma estimated economic losses in 2019 from natural and manmade disasters totaled USD140bn with the current insurance industry covering just USD56bn of that. As to the future, the World Economic Forum's 2020 Global Risk Report highlighted the increased risk of climate change-related disasters, in fact, climate change risks now fill the top 5 likeliest risks in their Leaderboard.

As the global protection gap continues to grow, new innovative entrants, have a clear target to aim for. To do so they need to address the trust gap between clients and insurers. Clients today are looking for simple, intuitive, transparent, and seamless insurance products – all aspects parametric insurance can provide with relative ease.

The key attributes of parametric insurance that fit today's customer are:

  • Trigger based – clearly defined transparent triggers and pay-outs.

  • No need for loss adjusters and the costly delays that ensue.

  • Simple policies, little or no exclusions and fine print.

A concern, though, is the basis risk – this is the risk that the insured could suffer a heavy loss and receive no payment because the event did not trigger or did not trigger enough. As we have seen time and again, it does not take this to happen many times to impact trust.

From the insurer’s perspective, parametric insurance, whilst traditionally, almost exclusively used for large scale CAT risks, can also effectively be deployed at the other end of the spectrum for low complexity low value lines, where the automation of the claim’s process and the removal of potentially fraudulent activity can have a significant effect on profitability and end customer experience.

The requirement for an underlying trusted data source (the Oracle) used to define the trigger at the heart of the insurance policy has, in the past, relegated parametric insurance to specific Weather or Catastrophe based insurance. Not only is this category becoming much more important in a climate change ridden world, but a huge number of other data sources to base triggers on are now available, from VanderSat’s drought indexes, Springboard’s PedBox measuring footfall to Qomplx’s pandemic trigger, no matter the insurance, it feels like there is a trusted supplier of the data you need out there.

The following chart shows the wide arrange of indices available in the market today:

OVERVIEW

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Click to access our report co-authored with Instech London on ‘Parametric Insurance’.

Insight – Parametric Insurance - 2021 outlook and the companies to watch

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