PARAMETRICS
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Conveniently for parametric insurers , the scope for each policy is much narrower than traditional homeowners ’ insurance , so risk becomes slightly easier to manage . Lacovara continues : “ The core pricing mechanism for parametric insurance is typically only reliant on a single degree of freedom – how likely is a specific set of events to happen ? Thus , carriers must only price for the uncertainty of that single set of events . Relative to indemnity insurance ( which has many elements of uncertainty ), this gives more margin for error for that one estimate , and makes parametrics inherently more scalable and means they require less data overall .”
What future risks will parametrics underwrite ? Both our experts are excited by the opportunities that increased uptake of parametric insurance would provide . Although most emerging risks are not currently covered by parametrics , some might be in the future .
“ Just a few years ago , even parametric flood wasn ’ t possible at scale ,” explains Floodbase ’ s Lacovara . “ However , the commercial satellite industry has provided the information necessary to build these parametric programmes worldwide . Similarly , wildfire has emerged as a parametric solution that relies on satellite data unavailable a few years ago .
“ It ’ s unlikely that the parametric insurance industry will directly drive much of the innovation that ’ s necessary to insure new things on a parametric basis – but more likely that carriers , MGAs , brokers and insurtechs will find new and clever ways to use technology to do so . There ’ s an adage : ‘ If there ’ s data , you can build a parametric ’. While not literally true , the spirit is probably correct .”
“ It ’ s a well-worn phrase but it ’ s true to say that if you can measure something , you can create a corresponding parametric insurance product ,” says Hara . “ We ’ ve seen great examples of parametric insurance in varied
82 July 2023