Rising interest seen in parametric insurance

Jeff Dunsavage, Senior Research Analyst

Parametric insurance appears to have received increased interest in 2020.

A recent Artemis article says growing awareness of and demand for these products seems to be driven by this year’s pandemic-related volatility as insurers and insureds “are increasingly focused on solutions that can rapidly deliver cash and enable better business continuity.”

According to the article, Aon’s Innovation and Solutions team has seen “a dramatic increase” in the number of clients seeking to understand how they might supplement or replace existing risk-transfer program with parametric structures “to potentially improve cashflow following a loss event.”

Unlike traditional indemnity insurance, parametric structures cover risks without the complications of sending adjusters to assess damage after an event. Instead of paying for damage that has occurred, it pays out if certain agreed-upon conditions are met – for example, a specific wind speed or earthquake magnitude in a particular area. If coverage is triggered, a payment is made, regardless of damage.

Speed of payment and reduced administration costs can ease the burden on both insurers and policyholders. Alone, or as part of a package including indemnity coverage, parametric insurance can provide liquidity that businesses and communities need for post-catastrophe resilience.

Parametric approaches are being discussed as part of insuring against future pandemics and are being used to protect hard-to-insure natural assets like coral reefs and mangrove forestsSwissRe and Understory offer parametric insurance for hail-prone geographies.

Aon told Artemis about a U.S.-based telecommunications company that replaced its entire traditional property indemnity insurance program with a $300 million parametric hurricane insurance solution. Artemis says such deals are increasingly coming to market, “with reports of a number of large transactions in the hundreds of millions of dollars this year, as parametric triggers are increasingly embedded within large corporate risk transfer programs.”