Parametric insurance could be the solution to Covid-19 insurance gap

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Machine Cover’s new policy will pay out automatically after a very significant downturn in economic activity

A new product in development by startup insurtech Machine Cover is using parametric insurance to help plug the gaps in cover that have been exposed by the Covid-19 pandemic.

GlobalData’s 2019 UK SME Insurance Survey found that just 17.3% of UK SMEs took out business interruption policies last year, but the majority of these policies do not provide cover for pandemics, leading to tension between businesses and the insurance industry.

When businesses were forced to close their doors across the UK to reduce the spread of the virus, insurers received an influx of claims on business interruption policies.

In order to pay these claims, insurers would need to hold large amounts of liquid assets, and the ABI expects its members to pay out £900m in business interruption-related claims as a result of the Covid-19 pandemic.

And GlobalData insurance analyst Yasha Kuruvilla said that this means the traditional model of insurance will limit the extent to which pandemic insurance coverage can increase.

“Given that only a minority of companies have cover against pandemics, the cost to insurers if the majority of businesses were covered would be exorbitant,” he said. “This limits the efficacy of the traditional insurance model when dealing with pandemics.”

And it is here that parametric insurance can help, working on the premise that once a certain event is triggered, a payout is automatically issued to the policyholder.

Grey area

The new Machine Cover policy will automatically pay out once there is a very significant decline in economic activity.

Kuruvilla added that parametric insurance would also help remove the “grey area” that has come to the fore during the furore surrounding denied business interruption claims, and will be considered during a test case at the High Court later this month.

“Parametric insurance could be a good starting point in navigating some of the insurance issues that have become apparent,” he said. “Since payouts are based on a clear, measurable statistic that is agreed upon by both parties, there is no grey area regarding whether a claim should be paid or not.

“While it is unlikely that one insurtech will be able to hold the required capital to successfully protect businesses against future pandemics, using the model of parametric insurance to do so is certainly worth considering moving forward.”