The world is a complex place. Weather affects our daily lives as well as many of our livelihoods, but it’s unpredictable and can be chaotic and destructive. Having lived through the pandemic, we all know that other chaotic events can be difficult for businesses and families. For this reason, Navisure Insurance Group offers parametric insurance as a way for businesses to complement more traditional commercial insurance offerings. If you are unsure of what parametric insurance is or how it works, read on.
What Is Parametric Insurance?
Parametric (or index-based) insurance solutions cover policy holders based on a predefined event occurring, rather than compensating for the actual loss incurred. This may sound complicated, but it’s fairly straightforward.
Traditional commercial property insurance covers losses that happen to the insured when a loss occurs like theft, vandalism, or cyber attack. The insurance company makes a payment when it’s determined that the loss has occurred and to what extent. The purpose of this type of insurance is to make the insured whole.
With parametric insurance, a loss does not have to occur for the insured to receive payment, only a triggering event. Whether the triggering event has occurred is measured by an objective parameter or index that is related to an insured's particular exposure. This event could be a tropical storm, a flood, or an earthquake, and the parameter or index would be the magnitude of the earthquake, the precipitation received, or the measured wind speed.
Other events might be less catastrophic, but still trigger a payout with parametric insurance. These would be things like power outages, low temperatures, and crop yields. The event must typically be measurable and quantifiable.
How Parametric Insurance Works
So, for example, if the insured takes out a parametric insurance policy that defines the trigger event as a hurricane or named storm with winds over 100 mph or an earthquake above a certain magnitude and the trigger event occurs, the policyholder receives a predetermined payout, regardless of the actual damages incurred. The insured gets speedy financial relief without the need for lengthy claims assessments.
Advanced technology and data analytics are integral to parametric insurance. Accurate and reliable data from weather stations, seismic sensors, and other independent sources are used to define and verify trigger events, not subjective, individual assessments.
Parametric insurance has so many applications, including natural disasters like hurricanes, earthquakes, floods, and droughts. It can provide rapid assistance to policyholders in affected regions.
Farmers can also protect themselves against adverse weather conditions, such as excessive rainfall or drought and temperature fluctuations that can devastate crops.
Large events that are dependent on specific conditions or good weather, like outdoor festivals or sports events, can also use parametric insurance to mitigate the financial impact of cancellations due to weather or other factors.
What Are the Benefits?
Speed and Efficiency: Quick payouts are a significant advantage to parametric insurance. It can provide immediate financial support to policyholders when they need it most and not months down the road.
Transparency and Predictability: The terms of parametric insurance policies are clear and straightforward. This reduces the possibility of disputes and uncertainty during the claims process.
Risk Management: Businesses and individuals can use parametric insurance to cover risks that are difficult to quantify or insure through traditional means, offering a more comprehensive risk management strategy.
In many cases, parametric insurance offers a faster, more efficient way to manage risk. It’s not designed to replace traditional commercial insurance, however. It’s there to complement that coverage and fill the protection gaps that come from indemnity insurance like excluded perils and deductibles. By utilizing data and predefined triggers, it provides a transparent and predictable form of coverage that can be particularly beneficial in areas prone to natural disasters and other specific risks.
If you have any questions about parametric insurance or any other kind of insurance, contact us at Navisure Insurance Group. We would be more than happy to answer your questions.
COREY VANDERMEER | PRESIDENT
Corey started his insurance career in the claims department for a national carrier and learned the basics of insurance coverage and how it’s applied. From there he decided to take the jump into sales and joined an independent insurance agency. Here he learned how to build coverage around the needs of each individual and cater to every client. When Corey decided to start an insurance agency he did so with the intention of simplifying the process of getting insured. With a focus on technology and simplicity; his goal was to create an insurance agency that was different from those currently dominating the market place.
When he’s not working, Corey enjoys golfing, fly fishing and spending time with his wife and kids. Together they enjoy traveling to Northern Michigan and to his wife’s hometown of San Francisco.