As insurers and reinsurers continue to advance their data analytics capabilities, parametric structures will increasingly be leveraged for more traditional classes of business, according to James Harrison, UKI Head of Insurance at global data and analytics firm, Dun & Bradstreet (D&B).
Parametric insurance, which is event-driven coverage rather than indemnifying the actual loss incurred, is growing in popularity due to transparency and rapid claims payment ability.
Typically, a parametric trigger structure is favoured in more specialist, hard to insure risks and regions where modelling capabilities may lack and the need for rapid payout post-event is extremely vital.
Structured to trigger if predefined event parameters are met, such as precipitation for flood or wind speed for hurricanes, parametric products remove the need for complex assessment and claims investigation.
As a result, for those in need of funds soon after a drought or flood, for example, has significantly impacted their harvest and therefore livelihood, a parametric product ensures fast payout which is vital to their recovery and resilience.
In part, the greater use of parametrics has been enabled by innovation around products and advanced data analytics, which have helped expand the reach of commercial insurance.
Against this backdrop, Artemis spoke with Harrison of D&B, who explained that as the industry’s ability to harness data analytics continues to improve, the world of parametrics looks set to expand.
“I think what we’ll see is an increased application of data analytics in the construction of products in the insurance industry. One type of product I’m a very big fan of at the moment is parametric insurance products – I think its expansion is inevitable.”
“Typically, these are being used for catastrophe losses, huge losses in the Marine or the Energy sectors. And, I think the reason why these have done so well is because they are quick. Essentially, everyone is very clear on the circumstances that would trigger parametric insurance products, and it stops the massive timespan in determining the value of a loss, and so it’s very cost effective for all parties,” said Harrison.
“I think we’ll start to see parametric insurance products actually filtered down to more of the traditional and less speciality classes,” he added.
As an example, Harrison highlighted Lloyd’s of London’s Product Innovation Facility, which has started exploring the use of parametrics for hotels.
The solution is designed to protect hotels from lost profits due to unexpected events, such as terror attacks, and leverages a parametric structure to trigger an automatic payout to customers.
This, explained Harrison, is the type of solution that can be replicated and expanded into other lines of business, essentially broadening the scope of coverage and helping to narrow the world’s protection gaps (disparity between economic and insured losses post-event).
Of course, basis risk can be a challenge with parametric solutions when compared with traditional forms of protection. And, while a certain level of basis risk is inherent with parametric solutions, advanced data analytics can help to create more sophisticated and bespoke structures that serve to minimise the exposure.