Figuring out the future and the now

Parametric insurance has been growing as a tool to manage risk transfer. This may become even more important as risks become more difficult to insure, and the basis risk becomes more palatable. Parametric insurance is showing signs of being ready for prime-time. Greater demand due to climate change, and greater supply as more entities and regulators become comfortable with it.

Unlike traditional insurance, it pays out based on predefined triggers, offering (in theory) rapid, transparent settlements and lower claims assessment costs.

Here are some key introductory points to start your thinking:

  • Growing regulatory acceptance as parametric solutions prove their value. (Issues of insurable interest have posed problems. Currently in testing in “sandbox” regulatory environments in a few countries including South Africa, where it has traditionally been viewed as non-compliant.)
  • Addresses previously uninsurable risks for corporates and governments, filling protection gaps. Good application for captive insurers (I’ll cover this more in a later post)
  • Complements reinsurance by covering areas traditional policies often exclude
  • Primarily used for commercial lines, but personal applications are emerging
  • Significant applications for transferring country-level risk for governments and certain NGOs
  • Basis risk remains a consideration, but can be mitigated somewhat through careful structuring

Exciting developments include parametric ETFs, allowing investors to participate in this innovative market. We’re also seeing creative applications using new data sources, like phone signals to assess footfall.

I can get theoretically excited about smart-contracts for parametric insurance, but in practice this quickly feels like unnecessary complexity with limited current benefit.

Parametric insurance can compete with reinsurance, but it’s often best used in combination, or as a tool for reinsurers to spread risk

As always, professional advice is crucial when exploring these solutions.


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