What is Parametric Insurance?
Parametric insurance is a type of insurance that basically follows an “if - then” formula. Payout is simply activated after a trigger event occurs. The trigger event is based on specified perils and can be anything from a cyber security breach to a flooded basement or even wind speeds. If the trigger event occurs, then the payout, which is predetermined, is made.
The key to parametric insurance is that all aspects of the trigger event and payout are established up front within the policy. This means that if a loss occurs, there won’t be a long drawn out claims process to deal with in order to receive payout. Parametric insurance increases the speed with which recovery occurs because all but the simplest of verification processes are cut out.
What are the benefits of parametric insurance?
The most notable benefit is the quick payout after the trigger event occurs. For businesses, this means money in their pockets faster. The immediacy of the payout for the event can prevent businesses from losing money during long claims processes or from extended downtime where they are unable to keep their businesses open.
Time and Cost Savings
For traditional insurance, the claims process can take months or even years. This can be tedious and expensive and can take businessowners time away from running the
business itself. Expenses are limited on the side of the insurance company and those savings can be passed down to Insureds in the form of low premiums.
Simple and Straightforward
The formula is understandable. If the triggering event happens at a predetermined metric, then the payout occurs. While there's still a claims process, it is very basic and can be clearly communicated and monitored.
Many parametric coverages are flexible and can be used as a standalone policy or as an add-on to an existing policy. There is often a flexible limit and it can be set in a bespoke manner for a given business. It can be used to fill the coverage gaps for more traditional insurance coverage which is often geared towards larger businesses.
Who does parametric insurance benefit?
Not only can parametric insurance be utilized as standalone insurance, it can also be partnered with traditional insurance to minimize coverage gaps or high deductibles. This type of insurance can help a broad range of businesses and individuals.
Small and Mid-Size Businesses
Parametric insurance benefits SMEs because they often don’t have the excess cash flow to pay for traditional indemnity insurance protection, especially for risks such as cyber. The investigation following a cyber breach can be tedious and take a long time to resolve. Small businesses can run into issues getting their systems back on track and lose critical revenue in the meantime. This is why the gap protection is so ideal for SMEs.
Large businesses have started moving toward parametric insurance to supplement their traditional insurance. When significant coverage gaps exist, such as NDBI, or extremely high deductibles are present, parametric insurance can be purchased to fill the gap
How is the payout calculated?
As stated above, all payouts are predetermined based on the event. They can be made as a one lump sum of the total limit if the trigger is met, or there can be another predetermined formula that is simple to measure.
For example, in a flooding situation, the percentage could be linked to the height of the water, such as:
5 cm water = 10% payout of total limit
30 cm water = 50% payout of total limit
45 cm water = 60% payout of total limit
Parametric insurance is continuing to increase in popularity as a way to close coverage gaps for small and large businesses alike. It’s a fast, simple solution that will help protect from business interruption and cash flow impacts when a loss occurs.
WonderCoverTM, the cyber & terror parametric cover for SMEs, is the first to include 3-in-1 protection against: Cyber Data Breach, Cyber Service Outage and Terrorism Disruption. To learn more, visit https://www.qomplx.insurance/wondercover/