Parametric covers and traditional indemnity-based insurance should not be compared in terms of price because they are fundamentally different covers, experts said on Wednesday.
Parametric policies can be more expensive than traditional insurance, but not always, according to annual market panelists from the Wholesale and Specialty Insurance Association in San Diego. The event is held in person for the first time since 2019 after being canceled due to the COVID-19 pandemic last year.
“A comparison of apples to apples is absolutely impossible. We shouldn’t be trying to do this, ”said Daniel Vetter, North American director of New York-based Descartes Insurance Solutions Inc..
Parametric insurance creates a different kind of value that is reflected in the price, he said.
Parametric hedging can be as cheap or as expensive as you want it to be, depending on the trigger mechanism, said Alex Kaplan, Washington-based executive vice president for alternative risks at Amwins Group Inc.
It depends on the peril you are trying to solve, he said. “In some circumstances, it could be higher notional dollars than traditional indemnity-based coverage, but it could also be lower,” Kaplan said.
For underperforming risk, the buyer will pay for an indemnity-based structure “where the parameter is clearly agnostic to the price of the indemnity,” he said.
Parametric insurance covers the probability of a predefined event occurring rather than the actual consequence that an event has on the physical structure or other asset of an insured. A key feature of parametric coverage is that it offers rapid claims settlement.
If a broker feels that parametric hedging is too expensive, “we would adjust the trigger mechanism,” Vetter said.
For example, for a parametric wind, it can only kick in during a Category 4 storm, or the hedge would kick in at Category 3, but maybe only 30% of the leverage pays, a t -he declares.
“We have this opportunity to play with the numbers to make them fit,” said Vetter.
Parametric insurance is often used as a complement or addition to an existing program, said Barbara Ingraham, New York-based general manager, Surplus and Surplus at Verisk Insurance Solutions.
“I don’t know if this replaces an existing insurance program,” Ms. Ingraham said.
Parametric insurance serves a fundamentally different purpose, Kaplan said. “It’s not asset protection, it’s balance sheet protection. You look at an entire organization, see how quickly a risk can metastasize into a balance sheet, and then design a structure around that, ”he said.
The parametric insurance space is evolving beyond weather and climate coverages, the panelists said.
For example, Descartes Insurance Solutions is in the process of determining how well it can set metrics around cyber exposure, Vetter said.
Because of its different structure, parametric insurance has the potential to enter areas that more traditional insurance structures do not serve, Ms. Ingraham said.
The risk of a pandemic can be covered by a parametric structure, Kaplan said. “We had one that would have covered COVID. What we determined was that it was not the pandemic itself that was creating economic losses, it was the government’s response to the pandemic, ”he said.
Using a civil authority trigger for COVID-19, a parametric structure could be built that uses social eavesdropping and creates a database of every tweet from a public official in the United States that led to a shutdown , said Kaplan.
There are pandemic-based parametric blankets that are triggered by civil authority shutdowns resulting from public health emergencies declared by the World Health Organization, for example, he said.