Advisen

Parametric insurance paying off for insurers, buyers

By Erin Ayers, Advisen

Parametric insurance has quickly risen in popularity over the last year, with traditional insurers and brokers offering up new solutions for emerging – or even age-old – risks.

The term “parametric” might seem new, but the concept of index-based insurance has been around for a while. For many insurance buyers, some loss scenarios might not warrant a traditional insurance policy and parametric insurance has been a hot topic as businesses seek new, more specialized ways of transferring risk.

Rather than settling on an amount after a sometimes lengthy claims process, parametric insurance offers a speedy, pre-determined payout upon occurrence of a specific, measurable event. For example, parametric insurance could be a good choice for a car dealership hit by a hailstorm or a drought in vineyard country.

As long as a loss can be measured by a third-party and tied to a specific set of parameters, it may be a candidate for parametric insurance. Players in the market say it can be used to manage climate-related extreme weather risks along with perennial issues like earthquake or drought. Although there may be drawbacks – for example, the pre-determined loss is an estimate and does not change when the actual loss figures come to light – it is becoming known as an efficient way to protect balance sheets and transfer risk.

It can also be used to expand insurance options in underserved areas. Just this week, Aon plc announced a partnership with Oxfam and blockchain platform Etherisc to provide micro-insurance against the risk of crop loss to farmers in Sri Lanka. Nearly 200 farmers have already enrolled in the program in an area. At a time when extreme weather patterns threaten the livelihood of farmers, parametric coverage and an automated blockchain platform to handle claims can broaden insurance availability and understanding.

Michiel Berende, chief inclusive officer at Etherisc, said, "Farmers represent a third of the workforce and account for almost 20 percent of the economy, yet very few have insurance. This made Sri Lanka a perfect candidate to feel the benefits of decentralized, collaborative, and automated insurance.”

The Aon-Oxfam-Etherisc venture joins other parametic offerings from Swiss Re, Marsh, Munich Re, the catastrophe bond market and many other innovations addressing risks like pandemic, windstorm, climate change, and other measurable events.

Editor Erin Ayers can be reached at eayers@advisen.com.