The stars are aligning for parametric insurance. As natural disaster losses mount, parametric insurance – which pays claims based on an event itself rather than actual losses – is garnering more attention. Not only does a need for parametric solutions exist, but the technology is now available to make parametric programs more successful. As a result, growth is accelerating. Per Swiss Re, the global parametric insurance market is expected to grow from $11.7 billion in 2021 to $29.3 billion by 2031.1
Losses from weather and climate-related disasters are on the rise. The National Oceanic and Atmospheric Administration (NOAA)2 has reported that the U.S. experienced 18 weather and climate disasters with losses of at least $1 billion in 2022. Combined, these events resulted in total losses of $175.2 billion. These figures are no longer enough to break any records, but such losses would have been unfathomable only a decade ago. From 2000 to 2009, the yearly average of billion-dollar events was just 6.7, which resulted in average CPI-adjusted annual losses of $60 billion.
According to Munich Re3, the majority of natural disaster losses are uninsured. In 2022, global natural disasters caused $270 billion in economic losses, but only $120 billion of these losses were actually insured. And the population that has insurance coverage can still have difficulty recovering after a severe loss. During widespread natural disasters, it is challenging for insurers to keep up with claim volume. The Tampa Bay Times4 reported that it took months for many insurers to pay claims resulting from Hurricane Michael in 2018. In fact, 12% of claims were still open a year later.
Property owners in these disastrous situations need immediate relief, which parametric insurance can provide. Since parametric claims are paid based on the location and severity of the loss event, it’s not necessary to calculate the actual losses. This eliminates the claims adjustment process and any disputes over which claims are eligible. It also makes fraudulent claims less likely. Per the NAIC, parametric insurance plays a significant role in the market for disaster insurance since payment can be made in a matter of weeks versus months or years.5
According to Reuters6, parametric insurance can soften the impact of climate risk and help communities become more resilient in the face of rising natural disasters. Examples of communities that have already benefited from parametric coverage include farmers, fishermen, and market vendors impacted by cyclones in Fiji and farmers impacted by excess rainfall and drought in Colombia.
Parametric insurance does not require lengthy individual claims investigations, but it does require data. To underwrite parametric insurance, carriers need to know the likelihood of a loss event. To issue claims payments, they need to know the precise location and severity of the event. And since they now have access to better data analytics and risk models, insurers are in the perfect position to launch and expand parametric programs.
According to Celent7, insurtech companies are leveraging data analytics and machine learning to make strides in parametric solutions. For example, Descartes Underwriting uses data sources such as the Internet of Things (IoT), satellite imagery, and radar, along with proprietary data integration algorithms for machine learning risk models, to provide better underwriting insights. Their data-driven parametric coverage is not only capable of keeping costs lower, it can also enable more accurate protection.
AXA Climate, a managing general agent of AXA XL, partnered with global property data and analytics company CoreLogic in 2022 to further enhance its parametric hail protection product.8 And commercial flood insurer FloodFlash, the first insurance technology company to offer sensor-enabled parametric flood insurance, has recently partnered with specialty insurer Hiscox. Using the latest in data modeling and IoT technology, these two insurers hope to lessen the flood protection gap in the United States.9
According to Swiss Re10, parametric insurance dates back to at least the 1800s, but it wasn’t until the 1990s that mainstream insurers started offering coverage. Even though it’s not a new concept, recent advances in data analytics and risk modeling – combined with a growing need for new insurance solutions – may mean parametric insurance is entering a golden age.
As it continues to evolve, the following developments are likely:
The insurance industry is under siege. The Insurance Information Institute14 says the property and casualty sector had an estimated combined loss ratio of 102.4 at the end of 2022. So, it is not a surprise to see carriers taking serious actions to limit their risk. PC360 has reported that Berkshire Hathaway’s AmGuard and Falls Lake Fire & Casualty Company plan to withdraw from the California home insurance market.15 This follows recently reported news that State Farm and Allstate would no longer be writing new home policies in California, citing increasing wildfire risk as one reason. And now Farmers Insurance has also announced that it will be limiting sales of homeowner policies in the state.16
There’s a need for new insurance strategies to respond to climate risk – and parametric insurance is emerging as an attractive solution to address many of the current challenges. Parametric insurance can also help policyholders receive fast payouts – especially when they are supported by modern digital payment solutions. At One Inc, we provide seamless digital payment experiences that allow insurers to deliver ease, speed, and convenience to their customers. Learn more.