More than $1.3 billion of InsurTech funding was completed during Q3 2018, double the figure from the previous quarter, according to a report by global brokerage Willis Towers Watson (WTW).
While individual investment rounds were larger, WTW says the number of transactions reported actually declined 20% to 57.
Q3 saw eight transactions over $40 million, up from six, and the continued active participation of re/insurers, suggesting that the pipeline of InsurTech partnerships remains very strong.
WTW’s latest report focuses on how InsurTech companies are deploying parametric structures, which unlike indemnity-based insurance pay out a predefined sum based on a trigger chosen as a proxy for an actual loss.
Parametric products align the interests of insurers and insureds in a way which traditional indemnity covers do not, by removing the parties’ respective incentives to manage down or inflate claims.
Parametric insurance is also substantially simpler than indemnity products, since it does not require costly claims handling. With parametric insurance, frictional costs can be very low.
WTW says some InsurTech firms have acknowledged these benefits and combined technology and information within parametric or event-based insurance structures to address existing inefficiencies or coverage gaps.
They reportedly use a combination of third-party and proprietary data, advanced sensors, and the capabilities of the Internet of Things to develop a new paradigm of insurance offerings for the connected world.
“The impact of parametric insurance can be much more profound than simply lowering frictional costs and mitigating the potential for fraud,” said Rafal Walkiewicz, Chief Executive Officer of Willis Towers Watson Securities.
“First, the use of parametric insurance encourages conversation around risk mitigation. Second, the simplicity of parametric insurance facilitates a decoupling of the various functions of the industry value chain and it allows for modularization.”
Dr Magdalena Ramada, Willis Towers Watson Senior Economist, added, “When automated correctly, besides being increasingly economical to deploy, parametric products are an important tool to access underserved segments and bridge coverage gaps.”
“Their underlying policy structure and digital nature fundamentally reduce the complexity and frictional costs of traditional insurance, allowing for the simplicity, scalability and flexibility needed to cater to most of these markets.”