One insurance One of the few industries that has remained largely unchanged over the past few decades is at a low level: You suffer losses as a direct result of something going south, and your insurance company pays you.
But this old paradigm doesn’t always work. For example, a construction company in an area that is regularly affected by hurricanes may see that its projects survive those storms mostly undamaged, but it may still see losses in terms of time and other potential costs because its crews simply cannot work.
Your traditional compensation policy might pay this company based on the size of their losses, but you won’t have to pay unexpected follow-up costs 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 clients based on the magnitude of losses incurred, standard contracts insure clients against the magnitude of events. So in our example, the construction company might see a return if there is a certain “trigger event,” such as a Category 4 or higher hurricane hitting the area, or if the wind speed reaches a certain predetermined mark.
Investor Nina Meyer, Director of Earlybird Venture Capital, put it very succinctly in our recent in-house tech survey:
“A modular insurance (as opposed to traditional indemnity insurance) is a type of insurance that predetermines the amount of compensation based on tangible ‘trigger’ events. For example, the payout can be tied to a specific weather event, such as the rise of a river above its flood point.”
This type of insurance is also called index-based insurance because it relies on data and automation, a combination that explains why this approach has such a tailwind. Rather than submitting and reviewing claims, the parties can rely on information that shows a triggering event occurred.
Leveraging data in this way makes the process more efficient for both the insurance company and the insured. “The main advantages of standard insurance are fast payments, high flexibility and the option to provide coverage for losses that are difficult to model,” Meyer said.
The quick payments facilitated by this model make it particularly useful for weather-related insurance, where those affected benefit most with quick access to funds. This is clearly demonstrated by the number of tech startups building parametric solutions for this space.