How parametric insurance is tackling fast-evolving risks

Parametric products hold the key to unlocking greater insurance penetration for fast-evolving risks related to climate, cloud technology and cyber, according to speakers on a recent Intelligent Insurer panel.

This type of index-linked insurance is evolving to keep up with changing risks, but panellists Ori Cohen, co-founder and chief operating officer of Parametrix, and Jaime de Piniés, chief executive officer of Blue Marble, agreed that the full potential of parametric insurance is still to be realised. They called for a greater push for education and information about its benefits for businesses and wider society.

When it comes to climate-related risks, a lot of the push to develop parametric products is coming from greater demand for cover as a result of increases in frequency and severity of catastrophes related to climate risk, de Piniés said.

“We’re seeing a lot more need for these products, and generally for protection against climate-related risks.”

De Piniés’s organisation is a consortium of companies that delivers microinsurance solutions to underserved populations. In 2018 it developed a parametric weather protection programme for smallholder coffee farmers in Colombia.

“As the associated costs of climate-related risks have increased, there’s far more demand for efficient products that can absorb the inefficiencies and offer an overall affordable product despite the increase in risk,” he said.

“On the supply side, what we’re seeing is much more demand for efficiencies, for integrations, for automation. Parametric insurance lends itself to this very nicely because we can have a platform with APIs that third parties can consume and use to automate the experience and the customer journey. That is how we’re seeing parametric evolve as an asset.”

Cohen said that there is more demand for “lean, efficient, clear and transparent processes”, which is a sweet spot for parametric products.

“In terms of geography, parametric innovation is universal,” she said. Her Parametrix Insurance business insures losses from cloud outages, such as the AWS outages in 2021 and 2022, and it has most recently been responding to the Microsoft Azure outage in January 2023.

“Everyone’s looking for comfort, efficiency and simplicity from all types of services. From our perspective, the cloud data centres are spread globally, so you have hundreds of them all across the world. If some of those go down, clients across the globe are disrupted.

“For example, the Microsoft Azure outage affected multiple regions and multiple services,” Cohen explained.

With such events, referred to as a “digital earthquake”, a simple parametric model is ideal, she added. The trigger is the outage event, her company’s monitoring system detects it and they notify clients that an event happened. Clients sign a declaration of loss and receive the payments.

Positive feedback loop

“The more clients who have a great experience with parametric insurance, the more that brings back trust in insurance products in general,” Cohen said.

However, there is still a “lack of education in the market” around such products, she added. “The positive experience clients and brokers have needs to be part of the conversation,” she said.

Emphasising the shift in client expectations, she added that businesses, and individuals more generally, don’t want small print that they don’t understand, and that is driving change.

“Everyone’s looking for quick onboarding, simple processes, everything needs to be efficient, and cost-effective. So it should be the same with insurance processes, underwriting and claims handling,” she said.

She said the market expects efficiency and cost-effectiveness, and clients are looking for fast recovery and certainty. Therefore, the clarification that parametrics bring to the table is key. It is the product’s ability to fulfil this need and demand that is helping to raise parametric insurance’s profile and showcase its potential to cover the difficult-to-insure risks.

Cohen acknowledged that clients’ expectations are high but said that this is the standard that companies such as hers want to meet.

As risk landscapes are changing and businesses are more dependent on third party cloud-based technologies, Cohen said that parametrics can “give the clarity that everyone is seeking”.

She said that technology risks change all the time and it’s the same with cyber and with data centres. The parametric model can be applied to cyber as long as the product is kept up to date with evolving risks. In terms of the cloud downtime cover Parametrix provides, Cohen said its underwriting processes, risk modelling, and all cloud downtime scenarios are “always being updated in real time”. It would be the same with cyber parametric cover, she said, adding: “I think that’s key”.

Emerging markets and climate

De Piniés agreed with Cohen that parametric innovation has universal application.

“Certain lines such as agriculture and general insurance, and in particular anything associated with climate risk, are lending themselves to this particular form of insurance, and it’s evolving quite a bit,” he said.

Parametrics have a particularly important role to play for emerging markets, he said.

“In emerging markets, you have pockets of the population that traditionally didn’t have access to insurance at all because it was too costly with indemnity-type products, and the business model wasn’t viable with other forms of insurance.

“By deploying parametric insurance as the way we model the risk and service the client, we’re opening up the business model to an entirely new customer segment because we’re reducing the cost.”

With greater access to data and alternative datasets, Blue Marble is now able to develop and implement products and secure risks that were not possible before. This has helped build trust in insurance, he said, because it involves customers who have never experienced insurance at all.

De Piniés and Cohen were speaking on a panel in a series of two debate sessions titled “Parametrics, a renaissance: cyber and climate change drive innovations”.

To read more from these panels or watch the full discussions:

Parametric: the time is now as the concept enjoys a renaissance  
Seven future trends for parametrics