insurance is one One of the few industries that has remained largely unchanged for the past few decades at a low ebb: You suffer losses as a direct result of something going wrong, and your insurer pays you out.
But that old model doesn’t always work. For example, a construction company in a region regularly affected by hurricanes might see its projects survive these storms mostly unscathed, but might still see losses in terms of time and other potential costs because crews simply couldn’t get to work. .
Your traditional indemnity policy might pay this company based on the magnitude of your losses, but you wouldn’t have to pay those unforeseen follow-on costs because they aren’t “damages” in the usual sense. It could be argued that the company is taking the short end of the stick here.
Parametric insurance, on the other hand, ensures that everyone can win. Instead of insuring clients based on the magnitude of the losses suffered, parametric contracts insure clients against the magnitude of events. So, in our example, the construction company may see a payment if there is a certain “trigger event,” such as the area being hit by a Category 4 or higher hurricane, or if the wind speed reaches a certain pre-specified mark.
Investor nina mayerdirector of early venture capitaldefined it quite succinctly in our recent insurtech survey:
Parametric insurance (as opposed to traditional indemnity insurance) is a type of insurance that pre-specifies the payment amount based on specific “trigger” events. For example, the payment could be tied to a certain weather event, such as the height of a river above the flood point.
This type of insurance is also called index-based insurance because it relies on data and automation, a combination that explains why this approach is experiencing tailwinds. Instead of filing and reviewing claims, both parties can rely on information showing that a triggering event occurred.
Leveraging data in this way makes the process more efficient for both the insurer and the insured. “The main advantages of parametric insurance are fast payouts, high flexibility, and the option to provide coverage for losses that are difficult to model,” Mayer said.
The quick payouts facilitated by this model make it particularly useful for weather-related insurance, where those affected benefit most from quick access to funds. That is clearly evidenced by the number of insurtech startups creating parametric solutions for this space.
