WSIA Education Session: A primer on parametric policies
Panelists discussed the benefits and underwriting process for these alternative insurance products.
Although parametric insurance policies have been gaining traction in recent years, they are actually the oldest form of insurance, according to panelists who participated in an education session on the topic during the Wholesale & Specialty Insurance Association (WSIA) 2021 Annual Marketplace.
“Think about life insurance. You die and a pre-agreed upon amount of money is going to be paid upon that triggering event,” said Alex Kaplan, executive vice president, alternative risk, Amwins Group. “That’s parametric insurance.”
Barbara Ingraham, managing director, E&S, for Verisk Insurance Solutions, explained that parametric policies are comprised of three elements: The amount the contract will pay, the parameter or trigger that prompts payment, and the independent verifying that the event did trigger coverage.
“Parametric insurance does not involve a traditional claims process. If an index gets triggered, a predefined payout will follow in a very short period of time,” explained Daniel Vetter, head North America, Descartes Insurance Solutions, Inc. “The instantaneous payout, we’re talking two to four weeks after an event, gives the insured a different tool to handle a sometimes catastrophe situation.”
Kaplen noted the fastest claims process for a parametric policy he knows of is nine hours and 44 minutes from first notice of loss to payment.
In addition to the speed of claims, the flexibility of the payout is also a benefit as the money can be applied to any direct or indirect financial loss associated with the event, according to Kaplan, who added: “As long as it has a nexus to that triggering event. You can’t have an earthquake-triggered event, and go out and buy a Ferrari.”
The third benefit is transparency, as policies are built on publicly available data. This gives insureds the ability to know just as quickly as the carrier whether or not they are going to get paid, Kaplan explained.
“When you talk about the actual trigger, you are identifying the right threshold at which it is going to create disruption, whether that be a physical disruption or economic disruption,” he said.
Vetter said underwriting parametric products is almost exclusively a modeling exercise rather than a more traditional approach of underwriting the physical attributes of a facility or an asset, Vetter explained.
“The underwriting processes when it comes to a parametric product really focuses on the probability of an event to happen or not, and the actual consequence the event has on the physical structure or other asset is actually not under our purview,” Vetter said.
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