Parametrics – Another Way to Solve Old Insurance Problems
Parametrics - a specialised form of reinsurance or insurance used mainly in catastrophe bonds - could become more mainstream in the commercial sector and enable risk managers to address some of the limitations of traditional insurance. That is the conclusion of a report from Airmic published today in collaboration with
Parametric solutions seek to provide clarity and certainty of coverage and speed of claims resolution for risks that might otherwise be clouded by exclusions and complex policy wordings. Underwriters and buyers agree in advance that a claim will be triggered by a pre-agreed occurrence or movement in an index without any need to investigate the precise extent or cause of damage.
Benefits of this type of policy include wider and more tailored coverage and rapid, more predictable, payment when claims are made with fewer hurdles to jump. It can also protect risks that traditional insurance tends to shun such as disruption caused by ash clouds and pandemics.
Risk managers have started to use parametrics in the travel, retail and agricultural sectors, and today's report envisages that it could be applied much more widely. A next step could be to develop parametric products that protect intangible assets and the risk of cyber-damage.
Insurance buyers wishing to go down the parametrics route face a number of challenges and may need to acquire new skills, states the report. The data demands of parametrics are different and, because the cover tends to be wider, it can be more expensive.
Buyers should, says the report, have a good understanding of the organisation's business model and risk landscape, and may need to gather support from senior colleagues internally. Getting the Chief Finance Officer on side at an early stage is recommended.
"This is an area of insurance that has the potential to grow rapidly, both in terms of the extent of its application and the number of companies that use it," said
"Concerns about large, complex risks directly related to business operations are on the rise - it's about protecting revenues. Parametric solutions can be used as a business tool to provide certainty and speedy access to liquidity when most needed. Risk managers are enablers and we can work together to develop highly bespoke protection." said
"Parametrics is still work in progress, but I can see it becoming mainstream in the future, because it offers certainty of timing and hassle-free payment," said Airmic chair
Another risk manager and Airmic board member
Airmic intends to follow up publication of the report with information for members. Its annual conference, The Future is Now, takes place in
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