New Applications For Parametric Insurance

The use of this type of insurance is not new but it is increasingly popular.

The first parametric insurance products—which pay when certain parameters are met, regardless of the actual loss assessment—were introduced two decades ago to protect against natural disasters like cyclones and earthquakes. But they were slow to catch on. Now, a new generation of parametric policies is drawing on advances in data science, sensor technology and artificial intelligence to expand use cases.

These new policies cover many nonphysical damage risks—even, potentially, reputation risk, says Thomas Keist, head of Marketing Innovative Risk Solutions, EMEA, at Swiss Re.

Parametric insurance doesn’t require verification of an actual property loss before a client payment is delivered. A parametric crop insurance policy, for example, could be triggered—and local farmers paid almost immediately—if wind speeds (the “index”) in a certain locale reach 75 miles per hour (the “trigger”) during the growing season. When the index is triggered, no questions are asked and there are no disputes: “That is what makes it appealing to risk managers.”

Global insurer Aon recently launched a parametric product to protect business income streams against events like cyberattacks or unseasonal weather. If a resort hotel’s revenue-per-available-room metric falls below a certain predefined threshold—say, 10%—a payout is triggered. Or if a retailer’s income plummets because of reduced “footfall” in a London shopping district—say, following a bogus terror report—a payment is made. CFOs like the product, says Kurt Cripps, head of Aon’s Innovation and Solutions team, because the immediate payouts smooth out companies’ quarterly earnings.

Another new product, created by Marsh in collaboration with Munich Re and Metabiota, uses a Pathogen Sentiment Index that gauges public fear to protect businesses against the economic impact of infectious disease outbreaks. If, for example, community anxiety reaches a certain level due to a local Zika outbreak and a sports arena has to cancel a basketball game, it could be entitled to a payment.

What enables these new products is greater access to data and increased ability to crunch the numbers. “Data is changing the way people buy insurance,” says Cripps, and parametric insurance looks to be a part of it.