Parametric Insurance: Time to Go Mainstream
The parametric angle
Parametric insurance is different. Parametric takes a different angle that makes it so interesting and powerful if well designed and marketed. While conventional insurance pays out claims based on actual losses incurred by the customer, parametric insurance instead covers the probability of a certain event happening. And upon this event occurrence, verified by a third-party data source, the policy pays a predetermined amount.
From an underwriting perspective, the premium is based on the size of the event (for example rainfall intensity) or the performance of the index (for example the flight delay), not the size of the loss. Naturally the parametric payout is correlated to (but not derived from) the financial loss, but interestingly the customers can accept a possible shortfall of the parametric payout versus the actual loss (called the basis risk) because they get other benefits like early payment, convenience, no hassle, positive interaction and transparency.
From a claims management perspective, the claims handling is totally redesigned, highly automated, as it will be triggered by data received from a verified source reaching a certain size. As a result, the internal management cost and the claims expenses are significantly reduced.
The success of the parametric insurance will depend on the relevance and timeliness of the proposition as well as the good product design. Data analytics is key based on publicly available data sources, paid data services or IOT sensors. Typical use cases are built on weather data, but we see more and more cases related to travel, events, health, property and even IT infrastructure and cyber security. There is a high potential for product innovation, creating new relevant propositions to specific customer segments.
The parametric untapped opportunity
Parametric insurance is not new but was mostly used in the last decades in capital markets (Cat Bonds, ILS, …) and large reinsurance and insurance transactions structured by large reinsurers, insurers and brokers. This is a huge and specialized market poised for growth due to technology and powerful data analytics capabilities.
Parametric insurance is traditionally highly intermediated, with large and medium-sized brokers bringing expertise in specialized fields to design innovative solutions mainly to large corporates and SMBs. Furthermore, in the last 6 years or so, with the rise of insurtech and Open APIs, small-medium brokers and MGAs have launched new ventures and propositions leveraging open data and cloud technology, targeting niche segments in property, travel, health and lifestyle insurance. Some brilliant MGA start-ups with innovative index-based propositions are trying to reach specific customer segments, generally in partnership with insurers. It is fair to say that success in such parametric offerings has been limited so far, but we believe they are the avant-garde of a wide territory to conquer.
The opportunity is there to embed parametric triggers in Commercial, Personal and Financial Lines, to cover some protection gaps and timely respond to specific needs driven by new lifestyle and consumer behaviours.
In particular, insurers, either in cooperation with innovative MGAs and insurtechs or by developing in-house product innovation capabilities, have a huge opportunity to instill the parametric principle in their mainstream insurance propositions.
Taking parametric to the mass market
The COVID-19 pandemic has raised awareness that the unexpected can happen, that the worst scenario is not impossible and that everyone needs minimal protection for their family, business and lifestyle against mass phenomena. Many discovered that their travel, income protection or business interruption policies did not cover the pandemic or lockdown events, leaving them in a difficult situation. Some simple and relevant propositions around protection will now resonate more than before, and the parametric approach can be very helpful in delivering the marketing message to the targeted audiences.
Beyond Covid-19, there is a wake-up call for insurers to address uncovered market needs like:
- Cover, at least partially, what is not covered in current lifestyle and accident policies
- Offer relief on major weather events
- Address situations where early payout is important to cover urgent expenses
- Offer comfort or convenience upon unfortunate events (like flight delay or event cancellation)
- Be sensitive to climate change impact that can be measured
- Add flexibility on Property & Casualty policies
- Add automation on claims
For all this and more, insurers can design mechanisms based on data events that could be appealing to customers. The challenge is then to productize and market them effectively.
Undoubtedly, insurers have to educate customers, more than ever, on these protection needs. The good news is that the “deal” is not so hard to explain to customers. The promise can be communicated along these lines, depending on the case: “you pay x€ and get paid out xx€ if a certain event occurs (as per an objective data source). No notification of loss needed. No questions asked. Automatically paid.”
Again, if the case is relevant to the customer, offered in a clear and timely manner, and at a reasonable price, customers will be receptive and even thankful. Whether it’s marketed as an event-based insurance or a microinsurance or an add-on to an existing policy, parametric insurance has the potential to increase premium volumes while enhancing customer experience and loyalty.
Parametric insurance to be enabled at the core
Parametric insurance by design is set to gain operational efficiencies through technology and automation. To realize the gains, the occurrence of the events stated in the policy must trigger core insurance processes, leading to instant notification, instant claims handling and (fully) automated claims settlement. The core insurance platform needs to have a powerful integration layer to connect to open data sources, trusted data services and IOT platforms, generating API calls, executing business rules and leveraging incoming data to activate insurance communications and resolutions.
Ultimately, parametric insurance delivers a delightful customer experience that is made possible by the core insurance platform orchestrating all customer events and interactions.
Go parametric. Automate and conquer.
IBA’s API-first IBSuite is ideally suited to enable parametric insurance. We regularly demo fascinating IOT-powered and parametric use cases on smart home and smart vineyard (crop insurance).
Reach out to request a demo
Written by Xavier Marcillac, VP of Sales, IBA
Published July, 2021