The insurance industry, in an effort to better address specific exposures and provide businesses and individuals with additional options to protect their properties or facilitate the purchasing of coverage, has developed several new solutions – from parametric to embedded products. Let’s take a look at what’s new in the industry.
Parametric insurance has gained traction over the last few years. It’s an index-based insurance product in which a claim is paid out based on a predetermined index, such as rainfall or wind speeds. In contrast to traditional insurance, parametric insurance does not compensate an insured for actual losses. Parametric insurance protects insureds from possible financial loss from a predefined event’s occurrence. In the event of a hurricane, for example, traditional insurance would pay an insured the value of the insured’s covered and actual losses, whereas a parametric insurance policy would pay the claim regardless of actual damages.
In fact, today, parametric insurance plays a critical role in the market for disaster coverage. According to the National Association of Insurance Commissioners (NAIC), parametric insurance “is attractive because the elimination of the claims adjustment process allows money to reach policyholders much faster. Payment can be made in a matter of weeks with a parametric contract versus months or years with a standard indemnity contract. For victims of natural disasters, the speed at which payment is made can have a significant impact. Firms insuring against business interruption risk, government agencies responsible for disaster response, and non-governmental organizations providing assistance all benefit from receiving payout faster because resources can be deployed more rapidly at the most critical time, right after the disaster has struck.”
Here are some examples of parametric products.
- AXA Climate’s hail product uses CoreLogic’s proprietary data to help businesses recover from financial losses such as property damage or business interruption following a hail event. When a business is hit by hail, CoreLogic’s technology captures the event and reports the maximum hail size at the insured location and the surrounding area. This Hail Verification Report is then used to determine whether a parametric policy has been triggered. There is no need for a loss adjustment, because payouts are predefined with the insured based on the maximum hail size declared in the Hail Verification Report.
- FloodFlash, which made its debut in the U.K. and recently entered the U.S. in five states (including Florida), will pay catastrophic flood claims as quickly as four hours, using computer models, cloud software, and connected technology to power its parametric products.
- Several parametric earthquake products exist, such as Shake & Pay, QuakeCube, One Quake, and Jump Start, that close the gap found in traditional earthquake insurance. Predefined triggers from data provided by third-party data ensure rapid payouts.
Embedded insurance is purchased during the commercial transaction for another product or service. It’s not a new concept but has been taken to the next level with tech advances and e-commerce capabilities. For example, an individual for years could purchase life insurance at the airport before a flight or auto insurance at a car dealership when buying a new vehicle. Now we have web-enabled embedded insurance giving customers the ability to get car insurance through sites like Credit Karma, vehicle parts insurance from original equipment manufacturers (OEMs) or via online car sales sites, and sports injury insurance purchased with ski passes, according to a report from Accenture.
According to a new report by Conning, embedded insurance could make significant inroads into both personal lines and small commercial insurance business, exceeding $70 billion in premium by 2030. With embedded insurance, carriers can expand their footprint to more consumers, with the buyer’s experience in obtaining coverage more convenient and straightforward. Though most products are low-cost and don’t need the expertise of an agent, consumers when asked in survey after survey prefer to speak with an agent when purchasing insurance for more valuable items. We could down the road, however, see embedded insurance covering more complex lines of business, Conning predicts.