(Image credit: Michael Gaida.)
While the majority of insurance providers do their utmost to deal with claims in an effective and efficient manner, the human resources, time and sheer cost involved in settling each claim, makes the whole process unsustainable in today’s competitive market. Increasing customer expectations of quicker settlements, as well as more transparency and accountability, is driving insurance providers to look for more innovative ways to improve the customer experience and keep ahead of the competition.
Enter parametric insurance.
Challenges and Promises of Parametric Insurance
Parametric insurance differs from traditional insurance because it determines the parameters for, and the level of, compensation prior to purchase of the insurance product. Rather than requiring a policyholder to prove or report a loss, e-businesses could synchronise their digital platforms with those of the parametric insurance providers, detecting an event that exceeds the predefined threshold and automatically triggering a pay-out.
Delivering efficient and profitable parametric insurance solutions, brings its own challenges, as it requires tapping into vast pools of data sources and applying advanced predictive models—which rely on cutting-edge machine learning methodologies, as well as novel actuarial techniques for estimating loss ratio uncertainty and optimal portfolio design.
As a result, parametric insurance has been mostly confined to sectors such as agriculture, where triggers include maximum sustained wind speed in the case of hurricane coverage; insufficient rainfall in the case of drought; or flood levels recorded by satellite images. Not only is the data collated by trusted independent environmental bodies, such as weather stations, but the techniques used to capture data—e.g., hazard modeling—are becoming far more sophisticated.
The ability to access accurate, in-the-moment insight—both for policy cover estimations and for triggering compensation—alleviates the time and expense associated with many claims. Now, with the level of success already seen in the agricultural industry, alongside new insurance-as-a-service platforms empowering e-businesses to gain these benefits without specific expertise, there’s nothing to stop parametric products being provided in other sectors, and by non-insurance players. For example, event organizers can ensure that ticket holders are automatically compensated for cancelled concerts, while online travel agents and airlines can provide on-the-spot pay-outs for delayed flights, missed connections and even lost luggage.
So, now that it is hitting the mainstream, what does this modern insurance mean for
e-businesses and consumers?
Benefits for consumers
For years, consumers have been overwhelmed by complex policies, navigating their way through reams of jargon-filled terms and conditions that include a variety of deductibles and exclusions, to the extent that they are often left wondering what is actually covered—and what isn’t.
Parametric insurance replaces traditional policy terms with simple conditions based on indisputable events, presenting this information to the policyholder in a clear and simple way. It also enables immediate and automatic compensation, removing the frustration associated with the claims process such as awkward telephone discussions, endless form-filling and legal disputes.
Benefits for e-businesses
Meeting consumer expectations is growing harder and harder, so offering insurance products that prevent frustration when something goes wrong is a vital way to build customer loyalty. At the same time, the parametric protection, with its associated claims-free experience, and immediate and automatic compensation, appeals more to consumers, meaning higher conversion rates on insurance add-ons and increased levels of ancillary revenue.
As parametric insurance picks up pace, it will begin to overtake traditional insurance products across various sectors and enable a wide range of e-businesses to play in the arena. In fact, in any sector where the policyholder is unable to influence the outcome, e-businesses could use the parametric model, offering their consumers appealing protections and improving the customer experience.