Parametric insurance experts don’t see the coverage replacing traditional insurance. But how are the specialized products currently used–and how could their adoption expand in the future?
Ten East Carolina students researched, organized, and led a presentation that explored these questions during a recent Academy of Insurance webinar. The roughly one-hour event marked the culmination of the upperclassmen group’s semester-long project in their advanced topics in risk and insurance course.
Those students don’t think parametric will replace standard coverage options, either. Instead, their research has led them to believe that the combination of parametric and traditional policies will provide a more comprehensive and well-rounded coverage strategy that ensures all aspects of a risk event are addressed.
“We believe this approach will be increasingly common as industries start to realize the value in having both types of coverage working alongside one another,” explained Tyler Bonds, one of the presenters.
What Is Parametric Insurance?
Instead of covering the value of actual losses, parametric insurance payments are triggered by predetermined, measurable thresholds, such as a specific amount of rainfall or wind speeds reaching a certain mile per hour within a set distance of a property.
Morgan Windley, another presenter, shared that these triggering events are the core of parametric insurance policies; they set predefined parameters that initiate agreed-upon payment even if the policyholder doesn’t experience a loss. This objective system can minimize moral hazard, and without a claims adjustment process, payouts can be made in days.
“While parametric insurance is fast and efficient, the challenge is defining policies that match real-world risk as closely as possible,” Windley said. She later added that coverages can vary by premium and corresponding payout structure based on measurable event intensity.
