Interest in parametric insurance coverage is growing
Discover how parametric policies can help meet the needs of property owners facing severe risks.
As the property insurance market continues to harden with rising rates, underwriting criteria getting stricter and insurers writing fewer policies, parametric insurance may be an option for property owners and operators. Parametric has enormous potential to help close the protection gap — to begin covering severe, low-frequency risks that until now have gone largely unprotected.
Unlike traditional property coverage, parametric insurance does not indemnify the pure loss but rather issues a set payment upon the occurrence of a triggering event, such as a hurricane of a specific intensity. Sometimes referred to as index-based insurance, this type of coverage is reaching a new level of popularity as organizations look for additional alternative risk transfer options.
How a parametric policy is tailored
A parametric policy pays out in full when the named peril reaches an agreed-upon threshold based on metrics from the U.S. Geological Survey. The payout is distributed in full regardless of the actual damage that occurred. It does not require claim filings or for insurance adjusters to review the site.
Parametric policies are tailored for a specific peril property owners face. In Florida, it could be a hurricane reaching a category or specific wind speed. For example, if a hotel in a high-risk coastal area took out a $100,000 parametric policy, pursuant to a Category 2 hurricane (100 mph winds), the hotel would receive the full $100,000 payout if the catastrophic event occurs on their property, regardless of the amount of damage to the hotel.
While parametric policies are paid regardless of the damage a property sustains, the policies are written with strict geographic parameters, so it’s rare for a natural disaster to occur without the underwritten property going unscathed.
No. 1 benefit: Speed of payout
One of the key virtues of parametric coverage is that it enables companies to deliver insurance more efficiently. With parametric insurance, you avoid lengthy claims investigations — basically, an index is triggered and a payout is made. No questions are asked.
For victims of natural disasters, the speed at which payment is made can have a significant impact. Firms insuring against business interruption risk and agencies providing assistance all benefit from receiving payout faster because resources can be deployed more rapidly at the most critical time, right after the disaster strikes. Also:
- Since a parametric policy meets the unique risk profile of the facility or real estate portfolio it results in a significant credit to the primary property policy; the parametric policy already covers the risk of property damage from a given peril like storms.
- Property owners and operators can use a payout to cover business interruption costs. If a hurricane results in a parametric payout even though the storm leaves a rental property covered by the policy operational, the owner can use the payout to cover forgone revenues as customers cancel reservations, for example.
- Since the amount of payment is unaffected by the total loss, the insured still has an incentive to minimize losses.
- Because there is no claims adjustment, an expedited payout allows real estate owners and operators to meet the obligations of their loss immediately and they can continue operations or reopen quickly.
- The risk of insurance fraud is also reduced for larger contracts because payment is standardized and the event is large-scale and independently verified.
- Parametric insurance may reduce transaction costs involved in writing and administering insurance policies because there is less need for actual loss assessment for payment of claims or underwriting rating requirements to determine the premium based on liabilities and extent of risk-sharing.
For these reasons and more, parametric policies are gaining traction across markets and industries, from auto dealerships to farms and agribusinesses, as a new innovative option to surface in response to the hard property insurance market.
Build the policy to fit your needs
Since parametric insurance is customized to each real estate portfolio’s unique risks, it allows building owners and operators to set the terms and conditions for payout. Because parametric policies are highly customized, real estate owners and operators will want to work with their broker to help set optimal parameters for coverage.
In an increasingly unpredictable and uncertain world where unforeseen circumstances can threaten the lifeblood of even the most well-built and successful businesses, smart risk protection is paramount. Parametric insurance products, when built well and designed to meet the complex and unique specifications of customers can help satisfy many of the precise needs of the moment we are living in.
Stefan Burkey is the hospitality practice leader for HUB International Florida. In this role, he oversees insurance placement solutions for owners, developers, and operators from limited-service hotels to full-scale resorts.
Related: