2022 Predictions: Parametric insurance will come of age

Addressing the insurance protection gap in lower-income countries was a key theme during the COP26 talks, and the announcement of a number of government initiatives to help bridge the gap and tackle climate change risks will further highlight the key role parametric solutions have to play in financing a greener future.

As a result, in the coming year take up of parametric insurance will accelerate, driven by a wider awareness that it is undoubtedly the future of claims and underwriting management, offering faster and more accurate pay-outs and more comprehensive coverage.

Once considered niche, parametric insurance now has the potential to deliver solutions where conventional indemnity products have failed.

With technology now available to enable real-time reporting – using accurate, reliable and often free data – more parametric covers will be placed across a wide spectrum of risk types and sizes, including cyber, health, earthquake, hurricane, drought and flooding.

Coverage can be triggered by a variety of measurable factors, including shake density, wind speed, water depth, rainfall and even crop health, for certain agricultural risks. Flight delays, footfall, and hotel occupancy rates are also being used as indices for parametric coverage.

Speed of claims acknowledgement and settlement is what people are looking for when they buy any type of insurance, and policyholders are often frustrated by lengthy claims processes.

By using predetermined and mutually agreed metrics, carriers can leverage data to immediately verify claims against parametric coverage, adjust them and then pay out a pre-agreed amount without disputes or processing.

Speedy capital deployment helps communities recover from natural disasters faster. And the predetermined triggers also result in a specific pay-out guarantee, ensuring carriers don’t pay out more than necessary, and giving policyholders a settlement in line with expectations.

Parametric solutions also allow for coverage of risks that have traditionally been excluded from claims, but which have a measurable objective parameter – such as demand surge during reconstruction, food spoilage, crop yields or stock market indices.

This is changing the game for carriers globally, and will continue to do so. With weather-related catastrophes continuing to leave communities broken in their wake, parametric insurance will increasingly be used help to streamline pay-outs and get help to those communities faster so they can start rebuilding sooner.

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