Parametric Insurance: Everything You Need to Know

Insurance is one. In one of the few industries that has remained largely unchanged over the past few decades, you lose outright if something goes south, and you get paid by your insurer.

But that old model doesn’t always work. For example, a construction company in a region that is regularly hit by hurricanes may see its projects survive these storms largely unscathed, but may see losses in terms of time and other costs due to workers not being able to get to work as easily.

Your traditional indemnity policy may pay this company for its losses, but not for those unexpected and consequential expenses because they are not “damages” in the usual sense. One could argue that the company is getting the short end of the stick here.

On the other hand, parametric insurance ensures that everyone can win. Instead of insuring customers based on the amount of loss they experience, parametric contracts insure customers based on the amount of events. So in our example, the construction company can see a payment if there is a certain “trigger event”, for example, if the area is hit by a hurricane of Category 4 or higher, or if the wind speed reaches a certain, predefined mark.

Investor Nina Mayer, principal of Earlybird Venture Capital, put it perfectly in our recent insurance survey:

Parametric insurance (as opposed to traditional indemnity insurance) is a type of insurance that predetermines the amount of payments based on actual “trigger” events. For example, the charge may be linked to a certain weather event, such as the elevation of a river above flood level.

Because this type of insurance is based on data and automation, the combination of why this approach enjoys a tailwind is also called index-based insurance. Instead of filing and evaluating claims, both parties can rely on information that shows a trigger event has occurred.

Using data in this way makes the process more efficient for both the insurer and the insured. “The key benefits of parametric insurance are fast payouts, high flexibility and the ability to provide coverage for losses that are difficult to model,” Meyer said.

The fast payouts this model facilitates make it especially useful for weather-related insurance. This is clearly evidenced by the number of insurance startups that are building tailored solutions for this space.