Parametric insurance and emergence of insurtechs

Over the next five years, cyber-attacks, climate change and the economic environment are the three main threats reported by the French insurance industry. These risks are leading to the emergence of new insurtechs. More specifically for parametric insurance, with regard to climatic risks, that are said to be increasingly uninsurable, this type of insurance policy adds transparency and facilitates the management of claims through the use of data.

[This interview is an extract from Clyde & Co’s webinar “Around the world in 90 minutes", April 2023]. 

What is parametric insurance?

With parametric insurance, the insurer's cover is triggered according to an objective index identified in advance (such as rainfall for insurance policies against drought risks). 

Each time the indicator set out in the policy is reached, cover is due, and the insurer pays a fixed indemnity, the amount of which is set in advance according to the intensity at which the indicator was exceeded. 

For instance, a farmer wants to be insured against the risk of drought. The parametric insurance policy can stipulate that if the sensors detect rainfall below a level specified in the insurance policy, in a certain area and for a certain period of time, then the farmer will automatically be compensated (up to an amount predefined in the insurance policy).

What are the benefits of parametric insurance?

On the benefits side of parametric insurance, there are a lot of them. In a very summarised way, the wording of the policies is simple and easy to understand for the insured. 

Furthermore, the compensation process is considerably simplified, and the compensation is fast compared to more traditional compensation methods which include various expert appraisals and methods of assessing the loss.

What are the limits of parametric insurance?

It is important to mention that some legal issues emerged in relation to parametric insurance policies. Two concerns can be mentioned:

• The first point concerns the combination of parametric insurance with the indemnity principle provided by the French Insurance Code. On one hand, under the indemnity principle, the sum paid by the insurer cannot be greater than the value of the loss suffered by the insured - the insured cannot make any profit as a result of the insurance. On the other hand, parametric insurance policies offer a pre-determined insurance indemnity. Therefore, the amount of the compensation could be unrelated to the actual loss suffered by the insured and this could result in a potential profit for the insured. 
• Another example of an issue encountered regards the insertion of the natural disaster coverage in the parametric insurance policies. If the insurance policy covers damage to property located in France, the inclusion of the natural disaster coverage is compulsory under French Law. Therefore question of the qualification of parametric insurance is central. 

What is the role of insurers and insurtechs in parametric insurance?

As technology evolves, access to high quality data becomes easier. Alongside insurers, insurtechs start-ups have a strong capacity to develop specific tools for parametric insurance. For example, this can include tools to measure the intensity of a hailstorm, the size of the hailstones and the parameters that will or will not trigger the insurance cover. 

For these insurtechs, it is easier to enter the parametric insurance market alongside insurers via the MGA path by offering insurers tools to analyse data.

Regarding the role of insurers in parametric insurance, innovation is a necessity for insurers. With new sources of data, insurers are able to understand climate risks in an innovative way and offer, via parametric insurance policies, coverage to property that were challenging to cover.

However, insurers, are in the front line of covering climate risks, but not only. Insurers also has a role to play in helping people and companies to set up prevention plans. Thus, thanks to data and parametric insurance tools, insurers can also provide their policyholders with tools that will enable them to assess and detect abnormal situations in real time and avoid a possible claim or limit the consequences by taking preventive measures earlier.   

In which areas can parametric insurance be applied?

Parametric insurance has great potential for development in areas other than agricultural insurance. Indeed, if parametric insurance is particularly tailored to the needs of the agricultural sector, it is also appropriate for companies that are confronted with natural risks as the agri-food industry, real estate development or tourism.