Over the last few years, natural disasters have roiled financial markets all over the world. (Indeed, according to NOAA’s National Centers for Environmental Information, there were 60, billion-dollar disasters between 2020-2022 in the United States.) Such occurrences – like the COVID-19 pandemic – exposed vulnerabilities in the supply chain that underscored the need for businesses to have robust measures in place to handle the unexpected. Due to the types of pressures that organizations and individual business owners now face, insurance companies are looking for new solutions to provide financial protection from ongoing risks like severe weather.
Parametric insurance provides a promising solution to this problem.
What is Parametric Insurance?
Parametric insurance is a type of insurance that pays out a settlement based on the occurrence of a pre-specified event. The benefit is typically paid out regardless of other damages that may have occurred. Parametric insurance can be used to protect against a wide variety of risks, including natural disasters, seasonal rainfall or temperature risks, supply chain issues, and more.
Parametric insurance can be an important tool for businesses and individuals to manage risk. For example, in the event of a hurricane, parametric insurance can be used to protect against financial losses resulting from property damage. In this scenario, the policy would pay out based on the strength of the hurricane, regardless of whether or not the business sustained any physical damage. Coverage of this sort can prove invaluable to businesses operating in regions that are susceptible to severe weather events.
Parametric insurance can also be used to protect against business interruption. For example, if a business is forced to close due to a flood, the parametric flood insurance policy would pay out based on the amount of time the business was closed. This type of coverage can help companies recover from unexpected disruptions and keep their doors open during difficult times.
How Does Parametric Insurance Work?
Parametric insurance offers financial protection from unforeseen events. Powered by trusted datasets, each policy specifies upfront the qualifying criteria and settlement amount so that a payout is swift when an event occurs–completely avoiding the drawn-out and subjective claim process needed for traditional policies. This enables transparent payouts to be disbursed speedily, eliminating the need for an adjuster to manually assess the damage on-site to verify a given claim. Consequently, parametric insurance is well-suited for events with clear triggers and known financial consequences, such as natural disasters.
Parametric coverage offers a unique safeguard against climate-related risks at an accessible price point for many underserved stakeholders like subsistence farmers who would otherwise be left without a way to hedge their losses.
Parametric insurance is an innovative solution for managing risks that has the potential to change the landscape of risk management for businesses all over the world. By unlocking coverage opportunities for underserved stakeholders and chipping away at the global coverage gap, parametric insurance can have a huge impact on businesses worldwide. If you're interested in learning more about how parametric insurance can help your business, click here to learn more about Arbol.