In order to address the significant insurance protection gap that has been highlighted by the ongoing COVID-19 outbreak, parametric structures should be considered, according to GlobalData.
As lockdown measures came into effect around the world, businesses of all shapes and sizes turned to their insurers for assistance through their business interruption insurance policies.
However, and as has been well documented, the large majority of these contracts do not provide cover for pandemics due to either exclusionary language or the need for a physical trigger element, such as a flooding event.
For many businesses from an array of industries, this came as a surprise and has resulted in rising tensions between businesses and the insurance industry.
Of course, some would have acquired additional protection linked to a pandemic and in these instances claims are expected to be paid. And, as was the case in South Africa recently, some businesses might well be successful in their court battles with insurers on this matter, but policy wording is going to be key.
With all of this in mind, the overall business interruption loss is expected to be limited for the re/insurance industry. For insurers and reinsurers this will be welcomed amid fears of being forced to retroactively pay for claims that they did not assume premiums for, something that numerous industry experts have warned would threaten the stability of the sector and hinder its ability to pay valid claims later in the year, from things like natural catastrophes.
But for business owners, the realisation that they were in fact not covered against pandemics under their business interruption policies has resulted in some significant financial difficulties, and served to highlight a COVID-19 insurance gap.
According to GlobalData, this COVID-19 protection gap can, at least in part, be addressed with the use of parametric insurance. An insurance contract structured utilising a parametric trigger enables rapid payout post-event as it eliminates the need for on-site loss assessment.
Parametric insurance contracts are structured to trigger when predetermined parameters, which have been agreed upon by both parties, are met. As an example, this could be an amount of rainfall in a specific location at a certain time – once the parameters have been met then the policy is triggered and funds can be rapidly disbursed to the policyholder.
Yasha Kuruvilla, Insurance Analyst at GlobalData, said: “Given that only a minority of companies have cover against pandemics, the cost to insurers if the majority of businesses were covered would be exorbitant. This limits the efficacy of the traditional insurance model when dealing with pandemics. Parametric insurance could be a good starting point in navigating some of the insurance issues that have become apparent.
“Since payouts are based on a clear, measurable statistic that is agreed upon by both parties, there is no grey area regarding whether a claim should be paid or not.”
According to GlobalData, startup Machine Cover is one entity looking to take advantage of the COVID-19 business interruption protection gap, by offering a parametric solution designed to cover businesses in future periods of economic downturn.
Machine Cover’s policy, says GlobalData, will automatically pay out once there is a significant decline in economic activity. The specifics are unclear but it looks like this parametric policy wouldn’t be directly linked to a pandemic outbreak, but rather a significant economic downturn as a result of a pandemic, or perhaps even a global financial crisis as seen in 2008.
“While it is unlikely that one insurtech will be able to hold the required capital to successfully protect businesses against future pandemics, using the model of parametric insurance to do so is certainly worth considering moving forward,” said Kuruvilla.