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Widening the parameters on parametrics

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Among the many issues reports on throughout the year is the industry’s continuing efforts to simplify claims resolution processes. It’s a challenge that’s complex and can result in frustrating and expensive legal entanglements.

As the industry becomes increasingly immersed in the world of technology, is there a hi-tech answer to the fact that processing claims is costly, resource-intensive and time-consuming for both insurer and insured? Parametric insurance may provide one solution.

Parametric cover is based on index measurement: a claims process is triggered when a certain metric agreed between the insurer and insured is reached. A fixed amount is then paid out, without any need to investigate the extent or cause of damage.

Index measurement could have application for insuring against natural catastrophes the industry might otherwise shun.

Parametric products are already available for earthquakes, cyclones, high temperatures, heavy snowfall and volcanic eruptions. And they are being used by the World Bank to insure against pandemic risk.

There are growing calls for parametric insurance to be adopted more widely. A recent report from UK risk managers’ association Airmic, in conjunction with Swiss Re Corporate Solutions and broker Marsh, says parametric insurance can address some of the limitations on traditional insurance.

While it is already used in the travel, retail and agricultural sectors, it could also insure against cyber risk, the report says. It provides certainty of coverage and fast claims resolution for risks that may otherwise be complicated by exclusions and complex policy wording.

Swiss Re Head of Innovative Risk Solutions Christian Wertli suggests the model could also be applied to renewable energy insurance, responding to unexpected weather.

However, ignorance is hindering its adoption more broadly. Mr Wertli suggests risk managers do not understand how parametric products work and can be applied.

“They are very easy to understand, and we want to make sure we demystify what parametric products are in practice,” he says.

Buyers seeking parametric insurance also face challenges.

It brings particular data demands, and because the cover tends to be wider, it can be more expensive, the Airmic report says. Buyers must win board support before incorporating parametric insurance into their overall risk management strategies, it warns.

“Buyers should have a good understanding of the organisation’s business model and risk landscape, and may need to gather support from senior workplace colleagues.”

Parametric cover offers growth potential for the industry. A report from law firm Clyde & Co says new indices are regularly being researched and deployed. If there is a strong enough correlation between the index and the insured’s expected losses, it should be possible to define a parametric solution.

Clyde & Co says lines of business that were not commercially viable may open up with parametric solutions.

Accurate information and local know-how will be needed to set triggers and calculate pre-modelled loss. This will build trust among buyers and regulators in areas where insurance penetration is low, the law firm says.

So could parametric insurance techniques help to solve the issues festering in Australia’s catastrophe-prone areas, especially cyclone-exposed northern Australia? In an industry caught between the conflicting philosophies of premium affordability and official duck-shoving, it certainly seems worth trying.