Parametric insurance policies are just one example of how insurance is changing. As the world becomes increasingly digital, younger consumers are demanding smarter insurance that caters to modern needs.
When everything from clothing to meals can be ordered on a phone and delivered to their front door, will consumers really want to fill in and post a paper claims form or visit the office of an insurance broker?
To match the new, digital world of service provision, insurers must go online. Yet, when all policy information is working together in the cloud, suddenly, new kinds of insurance become feasible that we never could have imagined.
This is making insurance both larger and smaller:
Larger in the sense that Big Data lets us look at the global insurance landscape from one view. Artificial intelligence (AI) can sift through that information and provide us with actionable insight on a scale far larger than human analysis can derive
Smaller, as hyper-personalization now allows every customer to receive a product tailored to their specific needs. Even when those needs change from day to day, or even hour by hour.
To clarify how this new outlook for insurance is already working in practice, we’re going to take a look at two new breeds of insurance; ones that are based on a data-driven, customer-centric, digital environment.
Below, we’re going to cover large-scale parametric insurance. In the next post in this series, we’ll look at tailored peer-to-peer (P2P) insurance, so keep an eye out for that post soon, but in the meantime – read on…
In 1906, an earthquake devastated San Francisco. Insurance claims totaled 100 times the amount paid in premiums that year, and 14 insurers went bankrupt.
Insurers desperate to halt claims started demanding proof of damage and cause. They even withheld payment if buildings were equally damaged by earthquake and fire, arguing the cause was not determined.
One firm, however, did things differently. Lloyds of London underwriter Cuthbert Heath cabled his agent in San Francisco and told them to “pay all of our policy holders in full, irrespective of their claims”. This bold act cemented Lloyds reputation, encapsulated in its motto: “fidentia”, or ‘utmost good faith’.
Today, the industry is struggling to find this magic touch. The metrics point to a deep crisis of trust in insurance, with only 21% of customers considering insurers trustworthy.
Parametric insurance is Cuthbert Heath’s legacy in digital form. It could well restore the faith of consumers by being there when it’s most needed.
In parametric insurance, when a natural disaster strikes, advanced AI systems will automatically pay-out to a set reserve across all policies potentially impacted by the event, irrespective of loss incurred.
This may sound concerningly expensive, but this isn’t a normal insurance policy. In standard insurance, customers experience a loss and then have to make a claim to recover the exact cost they incurred. This makes the insurer liable for all losses, as well as the administration cost of processing claims.
With parametric insurance policies, however, customers immediately receive a payment when a negative event happens. This not only skips all the costs and effort of processing claims, but allows insurers to set an exact reserve in case of large-scale catastrophe, meaning they won’t face bankruptcy like so many insurers did in 1906.
Not to mention, those customers who pay a premium price for parametric cover will be guaranteed immediate cash to help them deal with major events. This will help towards any losses they incur, but also serve to support them in troubled times, even when their strife isn’t related to an insurable monetary loss.
Think of it like providing a pay-out whenever a motor insurance customer has a car crash, regardless of the damage. If their car needs repairs, it helps cover it; but if the car is undamaged, the payment is just a nice compensation after a bad day.
This serves to support customers, not just when a loss occurs, but whenever an issue arises. Many businesses, for example, would have welcomed a quick cash boost as a fallback when the pandemic spread across the globe, even if their profits ultimately went unaffected.
Rather than a simple quid pro quo, insurers can become a valued partner service offering peace of mind in times of trouble, all with drastically reduced overheads in terms of resource and operational costs.
Swiss Re explains how this works in practice as:
A pre-agreed pay-out if the parameter or index threshold is reached or exceeded, regardless of actual physical loss sustained. For example, USD 10 million if a magnitude 7.0 earthquake occurs in a defined geographical area.
Swiss Re is an appropriate source to quote, as parametric insurance is currently under the attention of re-insurers or commercial policies. Mostly, it’s being offered as a service by insurtechs and data-focused underwriters.
Global Parametrics, however, is an innovative ‘neo-insurer’ that works “in challenging geographies to mitigate the economic effects of extreme climate and natural disasters”. They offer policies as a solution to climate change, rather than the traditional goal of insurance.
Could this radical rethink of the very concept of insurance be the key to winning back consumers who have lost faith in insurers on a smaller scale? Rather than giving the appearance of paying back exactly what’s owed and no more, with parametrics, insurers appear generous and supportive in times of trouble – a service you pay for gladly, rather than a necessity.
As parametric insurance grows, it could well start becoming a solution to the loss of trust in insurance. Yet, to get there, insurers need to update their technology to access the kind of Big Data analytics that unlock parametric insurance.
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