Can parametric insurance plug the risk gap?

In a perfect world, insurers would be able to measure every risk on their books all the time, giving crystal-clear oversight on their exposures and allowing legitimate claims to be paid out to clients in the most appropriate manner possible.

The messier reality of the economy unfortunately does not allow for that to happen, so insurers are often left with the arduous task of sifting through risks and claims whenever a loss event occurs. That can take a significant amount of time, and can cause issues for customers.

In the worst scenarios, the lack of clarity and information can prevent carriers from providing cover at all, causing significant protection gaps that leave insureds at risk of uncovered losses.

In this discussion at the Re/insurance Lounge, Intelligent Insurer’s online, on-demand platform for interviews and panel discussions with industry leaders, representatives from three innovative companies— Skyline Partners, FloodFlash, and Altelium—examined whether parametric cover can help bridge the gap between traditional insurance and uncovered risks.

Complex covers

For Gethin Jones, co-founder of parametric index provider Skyline Partners, the economic fallout from the pandemic is a prime example of how parametric cover can help ambiguous or complex risks that fall through the nets of traditional carriers.

There are examples from all over the world of insurers embroiled in what are likely to be long-running, expensive, and reputationally damaging legal cases related to nationwide lockdowns and business closures, as the effects of COVID-19 threw up a host of issues relating to policies and cover.

In many cases, carriers have denied cover or courts have sided with insurers, leaving businesses to pick up the tab, and Jones thinks that parametric cover could have plugged a serious gap in the market.

“We’ve seen it recently with the pandemic: all the businesses that folded and lost a lot of money because of a key risk that wasn’t covered—or couldn’t be covered using traditional types of insurance,” he said.

“If you had gone back a couple of years, I’m sure there would have been a parametric solution that could have been made available for pandemics, although it might be a bit more difficult now. It would have been a great use case for a parametric solution, and it’s a great tool to have alongside your traditional covers.”

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Working in tandem

Flood insurance is one of the most developed examples of parametric cover available in the market. FloodFlash, the parametric insurtech providing cover for flooding across markets including the UK and US, already sells around 75 percent of its products to businesses, according to product manager Nyasha Kuwana. She said that these customers have no option but to have similar coverage embedded in their property insurance.

In these cases, the customer is ordinarily using the platform to top up limits that are required but that traditional insurers are unwilling to offer. According to Kuwana, this shows how the parametric and traditional insurance markets can work in tandem to provide the best outcome for the client.

“The two centres already complement each other. When a business is buying insurance, they’re buying, let’s say, 10 covers. So, they’re already creating a package or programme of insurance. And we are part of that package, whether we’re embedded within a property cover, or just outside of it. They’re already looking at us as part of a programme, particularly as they buy through brokers, our customers. I don’t think they see the difference, they just want the flood box ticked,” she explained.

Kuwana added that parametric carriers, working with data-driven outcomes, are simply more comfortable than their traditional counterparts when it comes to moving into markets with a high degree of uncertainty or where others have been burned before.

“There are all kinds of opportunities for parametric insurance, where there are gaps and the insurance market isn’t meeting them. Alternatively, the market may be mature, but there may be hesitancy around the experience or fear of what others have experienced,” she said.

“When we’re talking about developing markets, sometimes that’s the problem. It’s simply the lack of experience. Even if the data exists, a parametric insurer tends to have greater comfort in these areas.”

Tech for tech

Technological advances are likely to play a significant role in helping address some of the issues that the pandemic has thrown up for the market.

The insurance world has developed rapidly over the last decade, said Charley Grimston, co-founder of Altelium, a provider of specialist cover for electric batteries. With the growing availability of sophisticated data and other platforms to measure more risks, the role of parametric cover is likely to grow in tandem with it.

“Undoubtedly technologies can play a much greater role in any business that’s in tech. And we’re in tech on both ends, in terms of our research into batches, and in our platform at the other end,” said Grimston.

“The insurance world has changed very quickly in the last 10 years, and perhaps even faster in the last five. In the next few years, we will see parametric providers embedding each other’s products together, because there will be opportunities to do that,” he concluded.

To view the full Re/insurance Lounge session click here