Seven future trends for parametrics

Key takeaways

- 90 percent of internet of things/parametric potential ‘is still to come’
- More affordable satellites open up previously unobtainable possibilities
- Improvements in flood mapping resolution bring better risk pricing
- Sensors ‘in your back yard’ will bolster trust in insurance

Parametric insurance, a simple index-linked form of cover, has a lot of unrealised potential. Newly accessible and more affordable tech means the evolution of parametrics could take a very different path from the one expected. Panellists from two Intelligent Insurer debates on the topic share their thoughts on what could shape the future of parametrics.

Panellists included Martin Hotz, head of parametric nat cat at Swiss Re Corporate Solutions; Laurent Sabatier, co-founder and executive director of Skyline Partners; Sid Mouncey, chief executive officer of Blink Parametric; Richard Coyle, head of major accounts and capacity management at FloodFlash; Ori Cohen, co-founder and chief operating officer at Parametrix Insurance; and Jaime de Piniés, chief executive officer of Blue Marble.

Tip of the IoT iceberg

Sensors used by parametric insurance firms to trigger payouts have come a long way in recent years. In the not-so-distant past, insurance triggers were based on “crude” measurements such as knowing that there has been a hurricane in a certain area, according to Hotz.

He pointed to product developments from companies such as FloodFlash, which offers insurance-linked sensors that people can put in/on their properties to measure exactly how a flooding incident has affected them.

Sensors “in your back yard”, as he put it, will also improve trust in insurance as they provide data from a policyholder’s exact location.

Hotz added: “With more and smarter sensors, we’re probably now seeing the tip of the iceberg, but maybe 90 percent of what’s possible is still to come.”

Ever-improving flood map quality

Improvements in the quality and accuracy of flood mapping and modelling, as well as more accurate and affordable internet of things (IoT) sensors have helped make FloodFlash’s business possible, according to Coyle.

As the technology advances, these developments will continue, he said.

Flood map and model developments have come from existing vendors such as JBA, as well as new entrants into the flood modelling world. “There are lots of great products coming from providers such as Fathom where resolution and the ability to price risk at very high resolution, five square metre accuracy, is letting us do what we do as a business,” he said.

IoT evolution has been another game-changer for Coyle. He said it has enabled his company to build a scalable product that includes an in-situ sensor, which is available to businesses of all shapes and sizes.

“The advancement in IoT technology has led us to manufacture a sensor which can be sold alongside our policies for just £100, a bit more in the US because of installation costs. That’s important to us, because as a business part of our ethos is trying to build that financial resilience for businesses of all shapes and sizes, to allow them to recover from catastrophic flooding,” he said.

“If you have sensors which cost thousands or tens of thousands of dollars being sold alongside policies, you’re only serving the tip of the iceberg of the market [because only the largest companies, rather than SMEs or consumers, can afford such high costs].”

Written in the stars

The rise of 4G satellites and earth observation is an exciting development flagged by Sabatier. Using this kind of technology remains expensive but the cost of accessing satellite imagery is coming down, he said.

“It’s cheaper to launch and own your own constellation of satellites than a few years ago.” Laurent Sabatier, Skyline Partners
“I would say it’s cheaper to launch and own your own constellation of satellites than a few years ago,” he said. Such constellations or “sky trains” (a reference to what they can look like from earth) include ISI, Spire, Maxar and Starlink, the latter of which is operated by Elon Musk’s SpaceX.

Sabatier said: “You can see startups launching constellations of satellites. This is something we would have never thought of 10 years ago. Now, there are startups raising capital and launching constellations of satellites to create new products. That is very exciting. That is going to be the next phase of parametric: blending satellite, sensors and data responses together in one single product.”

De Piniés also emphasised the advances in the world of satellites as large satellites are overtaken by constellations of “nano cubes” taking more and higher resolution images.

He said nano cube and satellite constellations have been around for a few years already but as time goes on they will provide an ever greater amount of timed data that can be integrated into a parametric offering.

“This will make underwriting climate risks far more precise, as well as the delivery of payouts. Setting payout triggers will be much more focused, sometimes on just a few square metre resolution, which is extremely good.”

Drought and bespoke crop protection

As weather forecasters suggest droughts could become more common in Europe as a result of climate change, farmers are looking for innovative crop cover.

Mouncey said he has seen bespoke parametric products in Germany that insure the amount of rainfall needed to keep certain crops at their prime production level.

“It’s great that solutions are becoming available in very large marketplaces that don’t have an adequate solution at the moment.

“It’s great to see all the new innovation, and the global nature of the solutions, as data sources improve and become more reliable and give you more historic data. There is so much more innovation to come in this space,” he said.

Fun with your (smart) fridge

The growth of smart devices presents an enormous opportunity not only for parametric businesses but for consumers, according to Mouncey. Household appliances are one area of opportunity, he said.

“If your fridge breaks down, you can get a piece of data that tells you what’s happened. Then a parametric insurer can send you some kind of benefit or a discount for a takeaway, for example. There’s all sorts of fun, cool stuff that I think we’re going to be able to do with this data.”

For insurers, he said, there remains a question around how the industry will leverage all the data from multiple different sources and different providers into a consistent way to produce products and services that make people’s lives better.

Pick and mix products

For Cohen, the future of parametrics might take some elements of this insurance forward while leaving others behind. “For some clients, the pre-agreed aspect of the parametric model is key, and maybe the claim process is less important,” she said referring to the pre-agreed triggers in contracts.

“Even using part of the model is already going to be key and it doesn’t have to be fully automated. Automation and claims is scary, especially when you’re talking about coverages of dozens of millions of dollars. Obviously, no-one wants to do that with a click of a button.”

She suggested that for certain clients using just a part of the parametric model will happen, and even be better, in future.

“Clients are looking for that lighter touch, clean and quick payments. More data is going to provide more accurate triggers, and it’s going to be used across the board, which for the parametric model will be exciting.”

Just ‘normal’ insurance

Hotz thinks there could be a shift in how people perceive parametric products. Rather than seeing it as an alternative risk transfer option, in the future it could be viewed as normal, or just regular, risk transfer.

“It will be insurance, just in a simpler different policy form, which gives you creativity and opens up options for addressing risks that otherwise seem to be uninsurable.”

He said that parametric has become more normalised over the past five years and emphasised that as a product group it is still young compared to traditional insurance. His view is that it will probably keep evolving at a rapid pace and will gradually become “normal” insurance.

De Piniés said he foresees an expansion of the use of parametric. “It offers a seamless experience, it offers speed of payout, which is what customers want and they’re expecting it in all industries now. Expectations are only going to go further in this direction.

“I could see how parametric becomes, with time, a far higher proportion of the industry and eventually maybe the main product that is offered because it’s the one that is automated.”

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