Q&A on Parametric Insurance with Amnon Keiny, Product Director.

What are your hopes for parametric insurance in the future? 

Parametric insurance is how we all want insurance to be. Most people know they can’t do without insurance, but they’re not too enthusiastic about having it either, because of the hassle that comes with it. It takes time to read through policy documents and understand what they’re saying and how to claim. Parametric is the opposite of that. You just buy it, and from that point on, we take care of you. And if the objective event happens, you’ll get the money immediately with no questions asked. There’s no need to make a phone call or file any documents. 

Embedded is how insurance should be in the 21st century. Of course, it’s easier said than done, and many covers aren’t parametric. But it is where the trends are heading. Property insurance is a classic example of a traditional insurance policy, and you might be wondering how it could become parametric. Think about a smart home; you’ve got sensors on the wall that measures humidity, and you have sensors that monitor your pipes. With sensors, you have an objective measure of the data, so now you can have parametric insurance protecting against a burst pipe. It goes hand in hand with the more widespread adoption of the Internet of Things. With everything being more connected, there’s room for more and more types of insurance to become parametric. Eventually, we’d like to see every kind of insurance working like this. 

What is parametric insurance?

Parametric insurance is a type of insurance triggered by an objective event. The factual event is monitored and recorded by a third-party data source, which we refer to as an Oracle, which measures something quantitative. The insurance is automatically triggered if the quantity crosses a predefined threshold. 

That sounds very technical, but two great examples are precipitation insurance and flight delay insurance. Looking at precipitation insurance, say you’ve taken out this cover to protect yourself from rain on your wedding day. Your insurance says that if there’s more than 10mm of rain in 24 hours, you’ll be covered, allowing you to change your plans and rent a hall instead of an open garden as you initially planned. 10mm of rain is a clear definition and a quantitative amount. There are agencies collecting weather data worldwide – let’s say the Oracle, in this case, is AccuWeather – so we can agree that the amount is clearly defined. The data is coming from an objective source. In the case of rain, there is 10mm of rain, or there isn’t. There’s no in-between. Similarly with flight delay, the flight is planned to take off at 10 am, and you are insured against a delay of two hours or more. There are agencies that record flight data, so the traveler can’t challenge the information. Your flight is either delayed or isn’t, and there’s an objective way to prove it. 

What makes it different from traditional insurance?

There are two critical differences between parametric insurance and traditional insurance. The first one is it’s binary. With traditional types of insurance, the amount of damage isn’t predefined, instead, it’s capped. If you want to make a claim, you have to contact the insurer, tell them how much you want to claim for and then go through a process to prove the damage. But with parametric, the insurer monitors the Oracle to see if the objective event has happened. So if on the day of your vacation, the Oracle shows your flight was delayed for longer than 2 hours, you don’t have to do anything to prove it because the insurer can see that the objective event has happened. This leads us to the second difference: parametric insurance is fully automatic. You don’t have to make a claim for compensation as the policy is automatically triggered when the objective event happens, which I think is the most significant advantage – no more hassle or claims process to go through. 

How is it different from embedded insurance? 

Embedded is all about how the insurance is offered – it’s included in an existing online purchase. Parametric is a type of insurance triggered by a clearly defined event. They are two independent things, but there is a lot of synergy between them, as parametric insurance perfectly suits the simple, straightforward nature of the embedded insurance model. 

What are some of the more unusual covers available?

Our weather insurance policy is innovative. Everyone worries about the impact bad weather could have on a holiday – unfortunately we can’t change the weather, but we’ve created a product which can help customers cope with it. For example, if you’re looking to book a holiday in Dorset in April but are undecided because you’re worried about being stuck in the cottage for days staring out at the rain, you can take out this cover. If three days before your vacation, the weather forecast says there will be downpours every day, you can cancel your trip and get your money back. This doesn’t just help give customers peace of mind. It helps agents to secure more bookings. It helps open up more off-season travel periods, maximizing the income possibilities for travel companies. 

How ready do you think the insurance industry is for parametric to take over?

It’s going to take a long time for insurance to go fully parametric, but I think in the coming decade, the products and availability will grow. It will switch from being viewed as the latest innovation to something that consumers look for, and with that, consumer demand will come more widespread adoption.

info@patterninsurance.com

About the author

Amnon Keiny, Product Director, Pattern Insurance.

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