The Future Looks Bright for Parametric Insurance

The stars are aligning for parametric insurance. As natural disaster losses mount, parametric insurance – which pays claims based on an event itself rather than actual losses – is garnering more attention. Not only does a need for parametric solutions exist, but the technology is now available to make parametric programs more successful. As a result, growth is accelerating. Per Swiss Re, the global parametric insurance market is expected to grow from $11.7 billion in 2021 to $29.3 billion by 2031.¹

Parametric Insurance and Climate Risk

Losses from weather and climate-related disasters are on the rise. The National Oceanic and Atmospheric Administration (NOAA)² has reported that the U.S. experienced 18 weather and climate disasters with losses of at least $1 billion in 2022. Combined, these events resulted in total losses of $175.2 billion. These figures are no longer enough to break any records, but such losses would have been unfathomable only a decade ago. From 2000 to 2009, the yearly average of billion-dollar events was just 6.7, which resulted in average CPI-adjusted annual losses of $60 billion.

According to Munich Re³, the majority of natural disaster losses are uninsured. In 2022, global natural disasters caused $270 billion in economic losses, but only $120 billion of these losses were actually insured. And the population that has insurance coverage can still have difficulty recovering after a severe loss. During widespread natural disasters, it is challenging for insurers to keep up with claim volume. The Tampa Bay Times⁴ reported that it took months for many insurers to pay claims resulting from Hurricane Michael in 2018. In fact, 12% of claims were still open a year later.

Property owners in these disastrous situations need immediate relief, which parametric insurance can provide. Since parametric claims are paid based on the location and severity of the loss event, it’s not necessary to calculate the actual losses. This eliminates the claims adjustment process and any disputes over which claims are eligible. It also makes fraudulent claims less likely. Per the NAIC, parametric insurance plays a significant role in the market for disaster insurance since payment can be made in a matter of weeks versus months or years.⁵

According to Reuters⁶, parametric insurance can soften the impact of climate risk and help communities become more resilient in the face of rising natural disasters. Examples of communities that have already benefited from parametric coverage include farmers, fishermen, and market vendors impacted by cyclones in Fiji and farmers impacted by excess rainfall and drought in Colombia.

Better Data to Improve Parametric Insurance Programs

Parametric insurance does not require lengthy individual claims investigations, but it does require data. To underwrite parametric insurance, carriers need to know the likelihood of a loss event. To issue claims payments, they need to know the precise location and severity of the event. And since they now have access to better data analytics and risk models, insurers are in the perfect position to launch and expand parametric programs.

According to Celent⁷, insurtech companies are leveraging data analytics and machine learning to make strides in parametric solutions. For example, Descartes Underwriting uses data sources such as the Internet of Things (IoT), satellite imagery, and radar, along with proprietary data integration algorithms for machine learning risk models, to provide better underwriting insights. Their data-driven parametric coverage is not only capable of keeping costs lower, it can also enable more accurate protection.

AXA Climate, a managing general agent of AXA XL, partnered with global property data and analytics company CoreLogic in 2022 to further enhance its parametric hail protection product.⁸ And commercial flood insurer FloodFlash, the first insurance technology company to offer sensor-enabled parametric flood insurance, has recently partnered with specialty insurer Hiscox. Using the latest in data modeling and IoT technology, these two insurers hope to lessen the flood protection gap in the United States.⁹  

Where Parametric Insurance Goes from Here

According to Swiss Re¹⁰, parametric insurance dates back to at least the 1800s, but it wasn’t until the 1990s that mainstream insurers started offering coverage. Even though it’s not a new concept, recent advances in data analytics and risk modeling – combined with a growing need for new insurance solutions – may mean parametric insurance is entering a golden age.

As it continues to evolve, the following developments are likely:

• Parametric insurance will become more mainstream. NBC News¹¹ says large insurance companies have been leaving Florida and California. As a result, insurance costs are increasing. According to Insurance Thought Leadership¹², it’s becoming nearly impossible for some policyholders to find adequate coverage at affordable prices. This may lead to increased interest in alternative options, including parametric insurance solutions. Parametric insurance could become mainstream in the near future.
• Parametric insurance will expand. Indeed, parametric coverage is well suited for floods, hurricanes, wildfires, and other natural disasters. However, it can also be utilized for additional types of risks. According to Lockton Re¹³, parametric insurance could protect against event cancellations, loss of sales, and even loan defaults, just to name a few. As parametric insurance becomes more common, its applications will likely expand.
• Parametric insurance will become more flexible. As data becomes more granular and risk models more precise, it will be easier for insurers to offer increasingly bespoke parametric insurance policies or combination policies with traditional and parametric insurance features. Policyholders will be able to design insurance policies to meet their needs and budgets.

New Insurance Solutions Are Necessary

The insurance industry is under siege. The Insurance Information Institute¹⁴ says the property and casualty sector had an estimated combined loss ratio of 102.4 at the end of 2022. So, it is not a surprise to see carriers taking serious actions to limit their risk. PC360 has reported that Berkshire Hathaway’s AmGuard and Falls Lake Fire & Casualty Company plan to withdraw from the California home insurance market.¹⁵ This follows recently reported news that State Farm and Allstate would no longer be writing new home policies in California, citing increasing wildfire risk as one reason. And now Farmers Insurance has also announced that it will be limiting sales of homeowner policies in the state.¹⁶

There’s a need for new insurance strategies to respond to climate risk – and parametric insurance is emerging as an attractive solution to address many of the current challenges. Parametric insurance can also help policyholders receive fast payouts – especially when they are supported by modern digital payment solutions. At One Inc, we provide seamless digital payment experiences that allow insurers to deliver ease, speed, and convenience to their customers. Learn more.

Sources:

1. Swiss Re - https://corporatesolutions.swissre.com/insights/knowledge/evolution-of-parametric-insurance.html
2. NOAA - https://www.ncei.noaa.gov/access/billions
3. Munich Re - https://www.munichre.com/en/risks/natural-disasters.html
4. Tampa Bay Times - https://www.tampabay.com/florida-politics/buzz/2019/10/15/florida-insurance-companies-took-months-to-pay-hurricane-michael-claims/
5. NAIC - https://content.naic.org/cipr-topics/parametric-disaster-insurance
6. Reuters - https://www.reuters.com/world/parametric-insurance-policies-help-cushion-climate-impacts-2023-05-19/
7. Celent - https://www.celent.com/insights/452111051
8. Insurance Business - https://www.insurancebusinessmag.com/us/news/breaking-news/axa-climate-partners-with-corelogic-on-parametric-hail-product-321665.aspx
9. Cision PR Newswire - https://www.prnewswire.com/news-releases/floodflash-announce-partnership-with-hiscox-301894127.html
10. Swiss Re - https://corporatesolutions.swissre.com/insights/knowledge/evolution-of-parametric-insurance.html
11. NBC News - https://www.nbcnews.com/business/consumer/homeowners-go-without-insurance-in-states-where-its-too-expensive-rcna88578
12. Insurance Thought Leadership - https://www.insurancethoughtleadership.com/personal-lines/us-ready-parametric-flood-insurance
13. Lockton Re - https://global.lockton.com/gb/en/news-insights/parametric-insurance-cover-expands-into-new-risk-areas
14. Insurance Information Institute - https://www.iii.org/insuranceindustryblog/category/industry-financials/
15. PC 360 - https://www.propertycasualty360.com/2023/08/16/more-insurers-exiting-californias-insurance-market/?kw=More%20insurers%20exiting%20California%27s%20home%20insurance%20market&utm_source=email&utm_medium=enl&utm_campaign=weekender&utm_content=20230819&utm_term=pc360&oly_enc_id=4013B1502589F3X
16. Forbes - https://www.forbes.com/advisor/homeowners-insurance/farmers-limits-insurance/