“cogito, ergo sum”
– Rene Descartes
Parametric insurance products are not new. They have been around for decades (and in some forms probably centuries). Insurance professionals have struggled to adopt to parametric solutions for our clients because they do not neatly fit into the indemnity paradigm we insurance professionals were trained into. Our entire training circular revolves around a financial loss and the indemnification of that loss. A hurricane damaged a roof, which costs an amount to fix, so we look into our insurance policies, determine if coverage, exists and for how much coverage exists and then the policyholder is made whole.
But there are all sorts of side effects that emerge from this paradigm:
- underwriting needs to be done to quantify the frequency and severity of the perils in the policy to a rate that makes sense to issue the policy. For natural catastrophe perils, this can be time consuming and fraught with uncertainty
- When an event does occur, it is likely occurring to many other policyholders as well, so there will be a demand surge on insurers resources to adjudicate the claim (lack of adjusters, lack of expertise, lack of access to the claim site). This adds to loss adjustment expenses
- The larger the event and the more complex the exposure the longer it will take to settle the claim. I have heard about Business Interruption claims that have taken months (exceeding 12) to settle. The cost of the forensic accounting can exceed the limit being paid.
The above scenarios are no-bueno when it comes to policyholders who desperately need a fast payout. What good is being made whole on my lost business income if I have to shut down my business before I can be made whole???
This is where parametric insurance shines. The payout is super fast because the trigger to access to the policy is NOT a property loss, but it is some physical trigger that gets met, such as the windspeed exceeding some threshold at a particular location, or the water depth of a flood reaching or exceeding some threshold as indicated in the policy. In those circumstances, payout can occur is hours or days. Not weeks or months. This is ideal for sensitive exposure that need quick settlement. (For those that want to learn more about parametric, I wrote this summary last year).
In this episode of Profiles in Risk, Tony spoke with Brian Thompson, Business Development Underwriter at Descartes Insurance – a parametric writer of natural catastrophe coverage. Descartes has built a brand on its parametric solutions, including the ability to create bespoke parametric policies due to their underwriting expertise.