The insurance industry has seemingly awoken from a slumber in the last few years, now comparatively surging with innovative energy and insurtech propositions. Parametric insurance, where a pay-out is made upon the occurrence of a triggering event, will become increasingly desirable for policyholders and providers alike in the time of climate change.
GlobalData forecasts indicate that the gross written premiums of fire and natural hazard coverage in the US will be $51,818m in 2020. The overwhelming majority of policies in this market will be traditional policies given that parametric insurance has only recently become more prevalent. However, parametric insurance will likely gain momentum as cover expands to protect against the occurrence of earthquakes.
A recent example is that of Cover Genius’ Shake Shield policy, which is being offered exclusively to accounting software provider QuickBooks’ customer base in California. The policy aims to provide businesses with the funds needed to quickly recover following an earthquake, with no need for physical inspections to be undertaken, instead relying on the quick processing of data from the US Geological Survey to determine whether the event qualifies for a pay-out.
This policy will undoubtedly be a hit with businesses in the California region, as the claims process is comparatively far more streamlined than that of a traditional insurance policy, thus reducing the stresses placed on the business and its employees when they begin to open. Providers of parametric insurance will also benefit through the reduction of costs associated with physical inspections, allowing them to invest capital elsewhere in the business.
With the global climate becoming increasingly unstable thanks to climate change, the case for parametric insurance to become more widespread in the commercial insurance market is growing. However, the deployment of parametric insurance should not be limited to commercial lines. The increasingly volatile climate will impact personal insurance lines such as home insurance. This year alone has seen an above-average Atlantic hurricane season, which has devastated homes as well as businesses, highlighting the opportunity for parametric insurance providers.