Parametric insurance: plugging the gaps in business interruption cover

Business interruption cover has been a hot topic since COVID-19 hit, with the pandemic making the owners of small medium enterprises (SMEs) painfully aware of the value of clearly defined, easy to understand coverage - but this was already a growing issue before coronavirus, according to Alastair Speare-Cole, president and general manager of the insurance division of QOMPLX.

QOMPLX, which is taking part in an Intelligent Insurer webinar on parametric business interruption cover on July 21, has carved a niche providing small businesses with parametric insurance solutions addressing the coverage gap for cyber and terror. With a growing customer base in the UK and internationally, it has received an enthusiastic response from SMEs to improve, but also simplify, their cover.

“The underlying issue we had until recently was that for places like Borough High Street, in London, and the city of Salisbury – from a terrorism and political violence point of view –  there was no business interruption cover for the retailers that were affected, because there was no physical damage. So when a baker in Salisbury had a cordon around it for months, it was not addressed by traditional business interruption policies,” he says, adding that this has been a particular issue at the SME end of the market, where the approach to business interruption cover has been far from joined-up.

“So much of the thinking about the product came from the traditional insurance silos; so the property department wanted a property SME product, the terrorism people wanted to have a terrorism SME product, cyber wanted a cyber SME product and so on,” he says.

Speare-Cole and his team recognised that from the point of view of an SME, the wordings of insurance cover were typically complex and opaque, and that this made it difficult to understand the cover and compare prices. Nowhere was this more pronounced than for business interruption.

“As an SME the products you are offered are very siloed, and also the broking community – the trusted advisor to these SMEs – sometimes struggles with this plethora of different wordings, technical detail and the sheer number of different products on offer,” he says. “There are many good exceptions to that rule, but we felt the whole scene for SMEs had become very suboptimal for the buyers.”

On top of this, the business interruption claims process is almost by its very nature one of negotiation and difficult for SMEs. Even when things run smoothly settlements take time.

QOMPLX’s solution was to put together a parametric solution that would challenge the market. Rather than indemnifying loss, parametric insurance works by paying out when certain pre-agreed trigger events take place. The amount paid out is agreed in advance when the cover is taken out, and is not determined by a measurement of the actual loss caused by the event.

The firm's current business interruption cover, fully launched this year, currently consists of three triggers: a terrorism event happening in your postcode zone, one of your nominated IT dependencies goes down for more than 48 hours, or having to issue notification of a breach of the General Data Protection Regulations (GDPR).

“In each of those circumstances we pay people money,” he says. “They don’t have to go through a claim adjusting process; we are not trying to assess loss, which may involve complicated accounting – we are simply saying that if one of these things happens, it is likely it is going to cost you money, so we are going to give you the policy limit you chose.”

While this is a disruptive solution, QOMPLX is not alone in this field. Speare-Cole highlights another parametric solution – from FloodFlash – as a particularly interesting development.

“FloodFlash installs sensors on your property at heights that you nominate, and you nominate an amount of money that you think you’d have to pay out if the flood got to that level. The moment a sensor reads the water, FloodFlash pays you – it’s a very elegant solution for flood.”

However, Speare-Cole does not believe that parametric is the perfect solution for all types of business interruption cover. In particular, he does not believe it would have been practicable for the COVID-19 pandemic.

“For certain types of peril – and COVID-19 is an example of this – it’s dangerous to write parametric cover because if we had half a million policies out there, there would be half a million claims; there is no miss factor. With parametric cover, if you can’t break the trigger down to narrow classes, narrow geographical event sets or very measurable event sets, you end up with a big accumulation issue which self-limits the degree to which insurers can give cover. So I don’t think that parametric solutions can deal with the Covid business interruption without the tail risk being supported by industry and government backstops”

Speare-Cole adds that in many cases, parametric insurance has an important role to play in enhancing the scope of cover available to SMEs rather than replacing traditional indemnity insurance, it can plug the gaps.

“Our vision is that people will still buy traditional insurance. We are not trying to replace that but there is a real role for supplemented cover on a parametric basis to cover a range of things where the customer would need to have cash up front to get his life back together, and for perils that might not be covered or affordable on an indemnity basis,” he says.

With this in mind, QOMPLX is focused on providing coverage for eventualities that are not currently addressed in a satisfactory way by traditional indemnity insurance. It also aims to adapt its offering according to the different risks and concerns of different geographies. For example, Speare-Cole anticipates demand for protection against power outages in Australia, while in America coverage for states of emergency is a possibility.

“We can imagine ourselves building bespoke peril sets for countries and also peril sets for individual trades or industry sectors as we get more sophisticated,” he says.

These possibilities will be among the topics discussed in the Intelligent Insurer webinar, called Harness Parametric Solutions to Deliver Enhanced Business Interruption Cover to SMEs, on July 21.

Speare-Cole will join key industry names to explore the possibilities opened up by parametric insurance and how to make the most of them.

“I would like attendees to come away with the fundamentals of what sits behind these particular initiatives and to really understand what drives the advantage of parametrics, but also to understand where it doesn’t work,” he says. “I would like people to be able to identify when a parametric solution would be perfect and to understand what criteria you have to fulfil to make one of these – and I hope people go away able to be imaginative about what problems they could solve with parametric cover.”

Speare-Cole will be taking part in our upcoming webinar titled Harness Parametric Solutions to Deliver Enhanced Business Interruption Cover to SMEs, taking place on Tuesday July 21 at 3pm BST/10am ET. Get the details on how insurers and their broker partners are using parametric solutions to achieve instant claims settlement, reduced time and expenditure on loss-adjusting, and the avoidance of legal disputes.

He will be joined by:

Click here to register now.