Demand for parametric insurance is on the rise as more people have started to recognise that these solutions can provide protection for things and events that could not be covered by indemnity insurance, said Peter Lacovara, Head of Commercial at Floodbase, in a recent interview with Reinsurance News.
In the last few years, the world has been impacted by several climate-related disasters that have caused large losses, both humanitarian and financial. Perils like flood have increased in number and severity, leading re/insurers to look at non-traditional solutions to help provide protection against the peril.
“We’ve seen more demand for parametric insurance, and if you ask anybody who is in this parametric insurance sector, not just Floodbase, you will get the same response. And there are a lot of reasons for that,” said Lacovara.
“It is generally a hard market across the world for property right now because of severe cat losses and non-cat losses, something that has driven people to look at alternative insurance solutions like parametric. But also, a lot of people are recognising the value that parametric brings to the table, the fact that you can insure things that you can’t insure otherwise.
“Also, now businesses are more complex than they’ve ever been, and large corporations are suddenly seeing parametric as this fantastic enterprise risk tool that the rest of insurances have never been for them,” he added.
“Historically, most businesses made or did something so their economic value was a function of their physical presence. Now most businesses do not work like that, especially now that many work from home,” he continued.
“For example, in California, when there is a flood, a lot of businesses are directly impacted not because the physical building flooded, but because they’re reliant on individuals coming to their shops and offices. And if people can’t get in their cars and drive down the road because of flooded roads then they cannot go to the businesses.
“As all flood insurance is done on an indemnity basis, and it’s really tied to physical damage, parametric is very good at insuring things that are not physical damage, which makes it a fantastic supplement to indemnity insurance.”
Lacovara believes that the increased demand in parametric insurance has been manifested more greatly in the flood space because, traditionally, flood insurance has been more constrained than insurance for other types of perils.
The peril also has one of the largest protection gaps compared to other weather related cat events – over the past decade, 83% of global economic losses from flooding were uninsured, according to the Swiss Re Institute.
Taking this into account, Lacovara highlighted that parametric insurance has shown to be one of the best tools to help shorten the flood protection gap.
“But also, floods are getting worse,” he added. “As a result of climate change, drought periods have become more extreme. With extreme drought comes very dry ground, and when it rains the ground can absorb very little water and the rest just runs off, resulting in worse floods.
“The fact that the atmosphere has also become warmer contributed to worse floods as the warmer air can hold more water. So, for example, an identical storm a hundred years ago would have dropped less rain than the same storm now.”
More and more countries have started to see greater weather extremes, but also more parts of the world are seeing increased economic output than ever before, which at the same time increases the need for more re/insurance, Lacovara highlighted.
He said: “As economic output increases, then the need for things like insurance grows with it. I think it’s safe to say that extreme weather and the acknowledgement that it’s here to stay are some of the main drivers that have made parametric insurance more popular lately.
“But also, the changes in economic output and just the general need for more insurance has driven people not just into the insurance market but certainly into parametric insurance, as they have realised it is such a useful tool.”
