A fact that has been hard to swallow and often debated is that insurance is not available to cover every loss. There are various reasons for this – perhaps the loss cannot be modeled with any degree of predictability to enable insurers to set an appropriate rate for coverage, or the loss is not accidental in nature and could have been prevented, or the loss would be so widespread and catastrophic that insurers could never take in enough premiums to cover all the policyholder losses, which of course can be said of pandemics. The current COVID-19 pandemic has hit businesses and the economy hard and so policyholders are looking to their insurers to recoup some of their financial loss, regardless if coverage actually exists on the policy for those losses. Because pandemic coverage is nonexistent on standard insurance policies, the question arises as to who should (and how to) cover the various costs arising from COVID-19 today, and any similar pandemic in the future. Therefore, the problem is being discussed and debated between insurers, governments and the capital markets.

This is where parametric insurance could come into the realm of future possibilities. Parametric insurance offers financial protection against losses that are often hard, or even impossible, to get insurance for, but in a nontraditional insurance structure. Traditional indemnity insurance, the kind we are all familiar with, pays out based on the cost of the loss incurred. Parametric insurance pays out when a predefined loss event occurs and the loss event exceeds a specific dollar or index amount that was preagreed to in the policy. Examples of perils covered and typical triggers include hurricane (wind speed), flood (height), earthquake (shake intensity), pandemic (number of infections) or cyber (reported data breach).

Take for example (quite simplified), flash flood insurance that is being offered in the U.K. on a parametric basis. Once a flood's water reaches a certain specified depth, the parametric policy pays out the amount specified in the policy, regardless if the insured actually suffered a loss from this flood. A parametric can be looked as an "objective" trigger. The trigger is set on the policy at the predetermined amount based on supporting data of prior floods and losses. Both the insured and insurer agree to this amount so it is a contractual agreement between the parties. The trigger that is set on the policy must correlate to the damage, so having supportive data is paramount. Advantages to an insured are that because the insurer knows how much the policy is going to pay out prior to the loss, claims are settled virtually immediately and the insured gets paid out quickly. If the insured has the coverage and the flood is at their premises, then the policy will pay out, regardless if there was actual damage, so the insured knows they will receive a payout once the water level reaches the established threshold. The insurer knows exactly how many policies will be affected by a given flood, eliminating uncertainty. Therefore, the policies are less expensive to the insured, and the insurer has greater predictability of losses and can set rates accordingly.