Analysts at specialist insurance intermediary New Dawn Risk have concluded in a new report that parametric insurance solutions will become more widely adopted for agriculture and natural catastrophe risks going forward.
In the report, analysts note that changes in the modern insurance environment have made many risks unpredictable, rendering them difficult to model and tricky to determine accurate return periods.
These changes have led to certain lapses in coverage, it suggests, creating a growing need for innovative solutions such as parametric insurance, which has emerged as an effective risk mitigating solution that offers certainty and protection for these gaps.
In particular, analysts highlighted how parametric coverages can be tailored for hard to insure losses, such as non-damage business interruption.
While many traditional insurance policies only pay out for business interruption if it arises directly from material property damage, recent events like the COVID-19 pandemic have illustrated that many BI and supply-chain disruption events are not the direct result of a physical property loss.
The way in which parametric solutions are structured, however, means that payouts are automatic when the policy is triggered and there is no need for the buyer to demonstrate a physical loss, making them ideal for BI losses and other intangible assets.
However, New Dawn Risk also maintained that parametric insurance should not be viewed as a competitor to traditional, indemnity-based insurance, but rather as a complementary form of coverage.
For instance, in areas where traditional insurance is hard to come by, particularly when market conditions are hard, parametric coverage can potentially offer a simple, cost-effective way for communities to build resilience to various natural hazards.
It could therefore be a useful tool in closing the insurance gap for natural catastrophe losses in developing and emerging economies, many of which have exposure to extreme weather events, and which are due to be disproportionately impacted by climate change.
“Many global providers prefer parametric insurance, as it does not require them to understand the complexities of the inherent risks vis-à-vis the assets they invest in,” said Aditya Singh, Head of Treaty at New Dawn Risk.
“This whitepaper discusses the fundamental ability of parametric insurance to cover products ranging from complex agricultural risks to property damage arising out of large natural catastrophe events.”
Max Carter, CEO of New Dawn Risk, also commented: “Ultimately, parametric insurance can provide an affordable solution for large-scale insurance of catastrophic risks in exposed areas, and we expect this to become more widely adopted over the next several years.”
