It's called parametric insurance, and it's particularly well-suited to climate change.
Over the past two years, wildfires in California, floods along the Mississippi River and hurricanes in the Southeastern United States have caused tens of billions of dollars in damage. In 2018, weather-related catastrophes prompted $215 billion in losses across the globe, according to a January 2019 report from Aon, AON, +0.81% a global insurance and reinsurance firm. That was well above the inflation-adjusted average since 2000. Aon said 2018 wasn’t even the costliest year on record.
Here’s how that works: Parametric policies require pre-defined events to occur for a consumer to receive a payout. The event itself doesn’t trigger a payout, but insurers will issue payouts if a certain threshold is met; for example, if a storm reaches a certain intensity level. Some policies are based on an honors system, others will automatically issue a payout, experts say.
There’s one major quirk to parametric insurance that may seem unusual to those familiar with more traditional property insurance: The homeowner doesn’t necessarily need to experience any damage to get a payout. “In a world where the climate is becoming more and more uncertain, the certainty offered by parametric products can be incredibly powerful and make communities more resilient,” said Matthew Jones, a principal at Anthemis and an insurance industry veteran.
One of those firms is Silicon Valley-based Assured Risk Cover, which offers a product called StormPeace that provides insurance coverage for hurricanes in Florida. The company was founded in 2017, and its product has received the stamp of approval from insurance regulators in the Sunshine State. When a storm hits an area where Assured Risk Cover provides coverage, the company will send an automated email to potentially affected policyholders notifying them of how much they are entitled to in terms of a claim. Each person can then reply to the email to attest that they need a payout because of the storm, and then Assured Risk Cover will send them the money, Jha said.
Getting a payout quickly in theory allows the homeowner to begin repairs right away and avoid worse damage. Getting a payout quickly in theory allows the homeowner to begin repairs right away and avoid the damage getting worse. When that effect is multiplied across multiple homes within a community, it can play a major role in preventing a disaster from causing widespread ruin.
As of today, most parametric policies are not designed to cover the total value of a property. While a drawback potentially for consumers who might lack other insurance coverage, that generally makes them a more affordable product because insurance companies can charge a lower premium given the lower risk.
Because parametric policies rely on data to approve payouts, there’s no need to maintain a large staff of claims adjusters. Assured Risk Solutions doesn’t employ any claims adjusters in fact, Jha said. “We have software developers, who have been in the risk-modeling industry and data scientists,” he said.
Parametric insurance cuts both ways: a policyholder could incur a loss without the necessary trigger being met. The basis risk posed by a given parametric policy can be higher if the insurance company is relying on less reliable data. Many people don’t recognize the consequences of climate change Experts say there’s a need to rethink traditional insurance. Much of the public has yet to reckon with the realities of climate change and realize that it will ultimately affect their lives and property, said Andrew Hoffman, a business professor at the University of Michigan.
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