In Focus: How can parametric insurance policies improve processes for climate-related claims?

WE ASKED: How can parametric insurance policies improve processes for climate-related claims?

Julian Roberts, managing director of risk and analytics, alternative risk transfer solutions, WTW

Whether you believe the causes of climate change are man-made or not, the resultant changes are plain to see as weather events become more extreme and unpredictable.

Parametric insurance policies provide a contract style that is well suited to addressing the increasingly uncertain – and often unmodellable – weather impacts associated with climate change.

Unique impacts arising from these claims may include the consequences of business interruption or additional expenses that are not associated with normal physical damage that conventional, indemnity-based insurance contracts specify before a claim is payable.

A parametric contract can be structured to cover the impact of a wide variety of perils not typically captured under a traditional insurance policy, including drought, excess heat and low windspeeds.

Furthermore, the flexible structuring allows for changes in both peril frequency and severity to be addressed.

Due to the volatility associated with a new climatology, it may not be immediately evident quite how changing weather may result in future economic losses.

Yet, these are the very losses that may be captured in the parametric contract design.

Parametric insurance should also not be seen simply as a replacement for existing insurances – importantly, they provide supplementary or additional capacity for risks not properly addressed by traditional policies.

While more traditional insurances typically follow a more cumbersome claims process, a key benefit of a parametric contract is the speed and simplicity of the claim payout, providing an instant infusion of funds as a lifeline after a catastrophic event.

Ciana Kenny, broker distribution manager, FloodFlash

The cons to parametric claims are few.

Where previously basis risk was a cause for concern, parametric insurers are now using increasingly sophisticated methods to measure policy triggers — such as sensors installed at the insured property — and are working diligently to provide expert assistance in selecting trigger values.

More than ever, parametric triggers are correlating with expected losses.

In a survey entitled FloodFlash Claims Retrospective, published in 2023, 100% of claimants reported receiving ”about the right amount” of claim payout six months after their flood.

Traditional claims often result in clients receiving less than the insured value of their policy due to average clauses or underinsurance issues – this highlights the advantages of the parametric approach and diminishes any complaints associated with it.

Many of FloodFlash’s clients don’t have an affordable option for flood cover in the traditional insurance market. In this regard, parametric claims improve customer outcomes simply by providing accessible coverage.

Furthermore, there are several advantages to the parametric claims process. Policy values and triggers are pre-agreed with the client, resulting in greater transparency around when the claim will be paid and how much money the client will receive.

Additionally, parametric claims eliminate the sometimes extensive back and forth of traditional claims because they can be processed much faster.

Our fastest claim to date took just three hours and 50 minutes to complete, from the flooding occurring at the client’s property to the money arriving in their account. This rapid processing speed not only provides greater peace of mind, but also jump-starts recovery.

Fast claims also reduce recovery costs by minimising business interruption and preventing issues like damp and mould from setting in during the claims adjustment process.

Ola Jacob, director of business development, Descartes Underwriting

One question posed in the Underwriting our Planet report, published by Deloitte and the World Wide Fund For Nature on 13 September 2023, is how to use technology to boost clients’ resilience.

A parametric policy, seamlessly integrated into a client’s disaster recovery strategy with a budget for swift action, proves instrumental in mitigating losses and expediting business recovery.

We’ve even witnessed some of our clients’ share prices skyrocket by over 50% because they bounced back quicker than the competition following an incident.

Leveraging our industry’s predictive technology enables proactive risk mitigation, empowering clients to make informed decisions before disaster strikes.

Another topic addressed in the report is how to enhance ‘building back better.’ Empowering business owners to leverage flexible parametric payouts, for both intangible and tangible financial losses, enables long-term strategic business recovery.

There’s an automatic incentive for clients to build back better, so their renewed parametric structure following an event dovetails with a better protected operation.

For instance, a business recovering after a flood may install shelves to raise stock 50cm off the ground, meaning it can purchase a parametric policy that’s more affordable than one that pays out at 10cm.

By leveraging insurers and loss adjusters, clients have the option of support and expertise for robust risk management resources too.

Tony Ray, chief underwriting officer for personal lines, Aviva

With climate change increasing underwriting uncertainty, Aviva offers access to FloodFlash for mid-market and digitally traded commercial property business via Aviva Marketplace.

This parametric insurance cover sits on top of a customer’s existing policy, meaning they are able to continue their wider cover with Aviva, while benefiting from flood cover.

Customers can choose up to three flood levels and corresponding payout amounts. The clear point at which a claim is triggered is unambiguous and claims are automatically reported when a mobile-connected sensor installed at the property detects the pre-agreed flood level.

The benefits for the customer are that a parametric policy is a simple form of cover, with no documents required at the time of claim – this also helps to keep premiums down.

From a claims perspective, parametric flood cover enables claims to be paid quickly – usually in 48 hours – ensuring a fast recovery for the business.