How parametric insurance could serve SMEs in a post-pandemic world

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Parametric insurance could help avoid a re-run of the Covid-19 business interruption saga, as the pandemic exposes real holes in the insurance market

The ongoing FCA business interruption (BI) test case could increase demand for parametric insurance products, particularly among SMEs if the court outcome goes against them.

Meanwhile insurers could still be hit hard with BI payouts; as a result they could look to do away with covering pandemic-related loss.

Would a parametric insurance model avoid a re-run of the Covid-19 business interruption dilemma and help rebuild trust in the insurance industry?

Parametric insurance is a type of cover that is triggered by an event, often a natural catastrophe. However, applying this model isn’t simple - elements such as indices need to be considered first.

Broadening market appetite

Speaking about parametric insurance, Matthew Grant, partner at InsTech London, posed two questions – does the market have the ability to underwrite it and what is the definition of an event?

“I would [say] that the market could support a $250bn market loss from a future pandemic, [but] if the market was able to price correctly and recognise that these things are still quite rare, it could build up a business around Covid,” he told Insurance Times.

“If you were going to [use] a Covid related payout, it would be impossible not to make it parametric. The good thing about parametrics is that they broaden the market appetite of the capital providers. If you are going to use a pandemic-related trigger and it was simple enough to understand then you would create more potential capital – it works both ways,” Grant said.

He identified parametric insurance as one opportunity, although he added that this product already exists, for example Machine Cover’s parametric offering, which is triggered by a downturn in economic activity.

Real hole in the market

Back in April, during a webinar for InsTech London titled ‘The Role of Parametric in Post-Covid World’, Alastair Speare-Cole, president and general manager of the insurance division at QOMPLX, said that there was “a real hole in the market” that was not being addressed, particularly in the SME sector - he described the loss adjusting process as a “horror for SMEs”.

This is because it is a very long process to get loss of profits adjusted. He said that in a post-Covid world, these problems get exacerbated.

Speare-Cole therefore suggested that basic protection could be given through multi-peril policies as they are cheaper to underwrite and adjust - this would be suitable for SMEs that may be struggling with their finances in a pandemic environment.

Educational barrier

Meanwhile Adam Rimmer, co-founder at insurtech MGA FloodFlash, said that the new challenge is how to get experienced brokers in insurance thinking differently about a new category of product.

“We find this strange correlation: the longer someone has worked in insurance, the longer it takes them to get parametric insurance,” Rimmer said.

FloodFlash has produced several videos and published relevant information on its website to overcome this issue.

Supporting SMEs

Mason Owen Financial Services is one of the brokers helping SMEs.

It partnered with FloodFlash and specialist property claims MGA Qlaims back in June to combine parametric insurance and project management repair work for its commercial property clients.

Speaking about the partnership, Andrew Gibbons, managing director at Mason Owen Financial Services, told Insurance Times: ”Parametric insurance accessible to SMEs is one of the most exciting developments in the last decade for businesses and property owners. It gives customers the certainty that a measurable event will result in a prompt payout.

“The technological developments pioneered here by FloodFlash have made that possible - we were instantly excited and have worked with them since they launched to regional brokers. They have turned a concept that was used to protect the New York Subway post Hurricane Sandy into something that is easily accessible the wider community.”

Gibbons continued: “Ultimately we found that the FloodFlash proposition dovetails with Qlaims perfectly, combining the prompt payout with the support of expert loss adjusters who can help to project manage the process of mitigating loss and restoring the business back to its full potential in the fastest possible time.”