How can insurers make parametric insurance a mainstream alternative to traditional indemnity insurance? By seeing risk differently, insurers can design parametric insurance to compete with indemnity insurance —with benefits for all—lower rates, reduced deductibles, and rapid settlement, capitalizing on AI to optimize payouts to within 90 percent of actual losses. Whether through policyholders manipulating claims to repay the deductible or in the rampant exaggeration of social inflation, basis risk in indemnity insurance is the difference between what was contracted in insurance coverage and what ultimately gets paid.
Parametric insurance cuts through the claiming shenanigans by making payouts instrumented and objective. Could all property insurance be made parametric? What would it take to develop a whole culture of parametrification?
Parametric insurance has so far been preferred where there was no preexisting insurance offering, as in micro insurance. However, typically this is also where the instrumentation is the poorest. Parametric insurance should also compete head-to-head with indemnity insurance, offering a cheaper product because it disintermediates loss adjustors and avoids claims inflation, while welcomed by insureds for its speed of settlement.
We look at where parametric has been most successful so far and also some of the challenges, as when a hurricane chaser provides the measurements that can trigger a $100 million catastrophe bond or the politics of a Philippines typhoon payout without a loss.
We explore the five tiers of parametrification: from simplistic “cat-in-the-box” structures, through weighted multi-instrumented indices, on to optimal hazard fields such as Moody’s HWind, refined with “exposure instrumentation” and the ultimate goal of automated AI-led damage and loss measurement. See how parametrification can shrink protection gaps and extend coverage into the new cyber-climate nexus."
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SpeakersRobert Muir-Wood Chief Research Officer, Insurance Solutions Moody's
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