Prepare for Parametrics...

Legacy Tech could lock Insurers out of this high-growth market

As extreme weather events related to climate change become more frequent, unpredictable, and complex, the demand for more comprehensive insurance coverage has been rising. To meet this demand comes parametric insurance also known as index-based cover. Where parametric insurance is especially useful is where there is a lack of capacity from the insurance market and also for risks that have been traditionally underinsured. The way parametric insurance is different from traditional insurance is that it covers the occurrence of a specific event by paying a set amount based on the magnitude of the event rather than paying for the magnitude of the losses like in a traditional indemnity policy. So the insured receives the payout based on the intensity of the insured incident, rather than the volume of the losses incurred. If the “parameter” is breached, the policy pays out.

How does parametric insurance work?

Parametric insurance is driven by real-time data from monitoring devices, radars, satellite imagery, and IoT technology. The events covered by a parametric cover can refer to an index-based trigger ( a crop shortfall) or an event occurring within a defined area which is sometimes referred to as ‘cat-in-a-box’ ( a hurricane or a tornado for example)  There is also another interesting feature around parametric insurance which is called ‘point of interest’ of the client. As the parametric insurance holder defines a certain point on the map with a geo coordinate, the cover is then not limited to the insured’s locations but it can also include other key infrastructure for the client which makes parametric cover particularly attractive. The payment is then made based on verifiable parameters, allowing a predetermined sum to be paid quickly without traditional loss adjustment.

The changing face of Parametrics

Parametric insurance is not new, and weather-related reinsurance cover, in particular, is very well established. Weather & Climate type insurance is still the most common form of insurance. It is estimated that over two-thirds of the global economy depends on weather conditions in some shape and form.  It’s been estimated that traditional insurance only covered 40% of the economic losses which were incurred due to natural disasters in 2019.

In 2021 alone companies specialising in parametric insurance have raised record sums: More than $110 million across 17 deals which was a record that 2022 has already eclipsed in a single deal, Descartes Underwriting’s $120M Series B.

This huge capital pouring into parametric is fueling expansion into new risk areas such as travel, energy, construction, terrorism, agriculture, etc. The parametric cover doesn’t have to replace the traditional insurance cover, what it does is that expands what can be insured.

The legacy problem

As we have previously talked about with Embedded Insurance, the importance of automation in Parametric Insurance means Insurers encumbered with legacy systems and processes risk being locked out of this large and growing market.

Capacity providers with previous-generation legacy bordereaux solutions simply won’t be attractive to the growing number MGAs of offering parametric solutions. One of the clear advantages of parametric insurance over traditional indemnity is the speed of payout. This requires systems that can provide instant coverage verification and payment request on receiving the trigger.