Insights

The Growing Demand for Parametric Insurance in a Post-COVID Environment

June 29, 2020
Closed sign in business window. Photo credit: Kaique Rocha.Closed sign in business window. Photo credit: Kaique Rocha.

The COVID-19 pandemic, a public health crisis unlike anything the world has seen in a century has devastated the balance of the global marketplace, sidelined millions of workers, and temporarily (or in some cases permanently) shuttered and handicapped once thriving commercial enterprises.

The global health crisis created a dystopian scenario unheard of in the modern history of the United States or the global manufacturing and retail economy: government-imposed shutdowns of the world’s major commercial markets. The effects of forced closures, travel restrictions, and mandatory quarantines have been felt in nearly every sector of the global economy.

As regular commercial travel throughout the world ground to a screeching halt almost overnight, airlines were forced to confront the reality of operating in a world where nobody was flying. Hotels were forced to confront the reality of operating in an environment where nobody was staying the night. And commercial businesses, ranging from restaurants to in-person retailers, felt, and have continued to feel the financial burden and weight of months of lost revenue and a less potent clientele.

The COVID-19 pandemic has fundamentally altered the world we live in. Everything from peer-to-peer to business-to-business interactions have been curtailed to conform to stringent public health requirements. In an increasingly contact free world where interactions of every nature are governed by new, public health necessitated norms, businesses are continuing to adapt to meet the challenges of the present moment.

While businesses are rightfully consumed in many respects at this moment with the day-to-day burdens of reclaiming a sense of normalcy in their operations, they should also be taking this time to look to the future and reevaluate how they manage risks. In an increasingly unpredictable and uncertain world where unforeseen circumstances can threaten the lifeblood of even the most well-built and successful businesses, smart risk protection is paramount.

Parametric insurance, a product that pays the user when a triggering event resulting in loss occurs, will be a key method to build resilience against upcoming challenges since payments can reach clients rapidly through disruptions and across remote areas. Parametric insurance products, when built well and designed to meet the complex and unique specifications of customers can help satisfy many of the precise needs of the moment we are living in.

Currently, parametric insurance makes up just 5% of the overall insurance market, but that could change quickly in the coming months and years as more businesses turn to parametric products to safeguard assets that traditional insurers have never been able to cover. One of the main things that COVID-19 is highlighting for many businesses is the need to manage large scale risks that have been talked about for years and that are now on the forefront of everyone’s thinking.

The All England Club, which hosts Wimbledon, the storied and prestigious tennis tournament held annually in London saw the risk that a pandemic could pose to its annual event after the SARS outbreak of 2003. The All England Club purchased a parametric insurance policy with an annual premium of around $2 million designed to cover losses in the event of another global pandemic that might threaten the annual tournament. Forced to cancel its tournament this year for the first time since World War II due to the spread of COVID-19, the All England Club ended up receiving a payout totaling $142 million.

The risk of a pandemic is just one of the major external disasters that businesses need to think about when looking to protect valuable and potentially vulnerable assets. Many businesses specifically will need to manage climate risks that can have an adverse impact on their supply chains. What the pandemic of the past few months has highlighted for so many is the importance of planning for the future and the need to act decisively to manage large scale risks before it is too late.

One of the other challenges that businesses have dealt with over the preceding months is the hardship of surviving periods of prolonged liquidity crunches. Uninsured businesses have faced the burden of mandatory closures that have forced many to layoff or furlough staff members and employ a range of cost-cutting measures in order to reduce operating expenditures during periods where liquidity is low.

Parametric insurance is ideal for helping businesses avoid the damage caused by even a short-term liquidity crunch because well-designed parametric products are built on the foundation of cutting edge, proprietary technology that can facilitate speedy payments to clients. What is especially ideal in the post-COVID landscape about the technology behind parametric products is that it cuts out the need for a lengthy process to assess losses and pay users.

As our world becomes increasingly contact-free, parametric products can facilitate a level of service that not only provides speedy access to payments, but that eliminates the need for a human adjustor to assess losses. Parametric coverage, when structured well, also removes many of the disputes that plague traditional insurance policies. For example, restaurants covered by traditional policies have experienced difficulty receiving payments to cover pandemic related interruptions to their businesses (an exception in many of their individual policies).

The world that we once knew has been forever altered by the COVID-19 pandemic. It has forced many businesses to reevaluate how they manage a wide range of risks as they look to avoid the prospect of facing a catastrophic event in the future without a versatile safety net in place. Parametric insurance is growing in popularity across a number of different industries for the precise reason that many businesses understand the value that a well-designed product has to help them manage and protect against the unique risk environment that so many are dealing with.

In a world that is increasingly contact free, full of external and unpredictable risk, and where prolonged liquidity crunches can hamper even the most successful and stable businesses, insurance needs to be more than just a safety net. It needs to adapt to meet the needs of the current moment and help its users survive and thrive in the face of a growing list of complex global challenges.

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