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Parametric covers and traditional indemnity-based insurance shouldn’t be compared on price because they are fundamentally different coverages, experts said Wednesday.
Parametric policies can be more costly than traditional insurance but not always, according to panelists at the Wholesale and Specialty Insurance Association’s Annual Marketplace in San Diego. The event is being held in-person for the first time since 2019 after being canceled due to the COVID-19 pandemic last year.
“An apples-to-apples comparison is absolutely impossible. We should not be trying to do that,” said Daniel Vetter, New York-based head North America for Descartes Insurance Solutions Inc.
Parametric insurance creates a different type of value that is reflected in the price, he said.
A parametric cover can be as cheap or expensive as you want, depending on the trigger mechanism, said Alex Kaplan, Washington-based executive vice president for alternative risk at Amwins Group Inc.
In depends on the peril that you’re trying to solve, he said. “In some circumstances it could be the notional dollars more than a traditional indemnity-based cover, but it could also be less,” Mr. Kaplan said.
For a poorly performing risk the buyer is going to pay for an indemnity-based structure “where the parametric is clearly agnostic to the price point of the indemnity,” he said.
Parametric insurance covers the probability of a pre-defined event occurring rather than the actual consequence an event has on the physical structure or another asset of an insured. A key feature of parametric cover is that it offers a fast claims payout.
If a broker feels a parametric cover is too expensive “we would adjust the trigger mechanism,” Mr. Vetter said.
For example, for a wind parametric it may only kick in at a Category 4 storm, or the cover would kick in at Category 3, but maybe only 30% of the lever pays out, he said.
“We have that opportunity to play around with the numbers to make it fit,” Mr. Vetter said.
Parametric insurance is often used as a supplement or addition to an existing program, said Barbara Ingraham, New York-based managing director, excess & surplus, at Verisk Insurance Solutions.
“I don’t know that it replaces an existing insurance program,” Ms. Ingraham said.
Parametric insurance serves a fundamentally different purpose, Mr. Kaplan said. “It’s not asset protection, it’s balance sheet protection. You’re looking over the entirety of an organization seeing how quickly a risk could metastasize across a balance sheet and then designing a structure around that,” he said.
The parametric insurance space is evolving beyond weather and climate covers, panelists said.
For example, Descartes Insurance Solutions is in the process of determining to what extent it can build parameters around cyber exposure, Mr. Vetter said.
Because of its different structure, parametric insurance has an opportunity to get into areas more traditional insurance structures don’t serve, Ms. Ingraham said.
Pandemic risk can be covered by a parametric structure, Mr. Kaplan said. “We had one that would have covered COVID. What we determined was that it wasn’t the pandemic itself creating economic loss, it was the governmental reaction to the pandemic,” he said.
Using a civil authority trigger for COVID-19, a parametric structure could be built that uses social listening and builds a database of every tweet by a public official in the U.S. that led to a shutdown, Mr. Kaplan said.
There are pandemic-based parametric covers that are triggered by civil authority shutdowns resulting from public health emergencies declared by the World Health Organization, for example, he said.