Explore a World of New Opportunities with Parametric Insurance

Explore a World of New Opportunities with Parametric Insurance

Darin Reffitt

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While insurance is by nature among the most risk-conscious businesses in the world, insurers are nevertheless caught in a perfect storm that continues to threaten the bottom line. Global disasters continue to increase in both number and economic impact, with five of the 10 costliest events on record occurring within the past six years. Inflation and supply chain disruptions continue to drive up claims costs for insurers around the world. Meanwhile, reinsurance demand is outpacing supply, resulting in higher costs for those able to obtain it and additional exposure for those outbid on recent renewals.

Insurers searching for safe harbor in this storm are seeking innovative ways to simultaneously serve new customers, reduce exposure, and decrease costs. Increasingly, this leads them to explore an emerging market opportunity: parametric insurance, where the worldwide market is projected to nearly triple by 2031, from $12.8 billion to $29.3 billion. While parametric policies have been predominantly leveraged in the catastrophe bond (CAT) market, they are increasingly being offered to consumers and to the small to midsize business (SMB) markets.

Parametric Insurance Defined

Parametric insurance is a type of insurance that pays out a predetermined amount of money based on a specific event or condition occurring, rather than on the actual losses incurred by the policyholder. Generally, the specific event or condition—the parameter for a claim—is based on data provided by an independent third party. Learn more about the rise of parametric insurance in this blog post.

As an example, a parametric insurance policy might pay out a specified amount of money if an earthquake with seismic activity above a certain threshold impacts a particular geographic area, such as a U.S. zip code, with the data independently reported by the U.S. Geological Survey.

Benefits of Parametric Insurance

For policyholders, parametric insurance can provide some peace of mind at either a more affordable price point or in situations where more traditional policies are simply unavailable. Since parametric insurance is based on specific triggers, it can also be more flexible and customized to meet the needs of different policyholders. A number of industry experts predict the growth of more hybrid insurance products that combine the benefits of traditional indemnity-based and new parametric event-based coverages within the same policy. For example, a farmer might purchase parametric insurance that pays out if there is a drought in their area, while covering that same crop against events like fire or third-party damage via a traditional farmowners policy.

For insurers, the benefits of offering parametric insurance drive more directly to the bottom line:

1. Simpler Claims Process

Since payouts are based on predetermined triggers, there is no need for lengthy claims adjustment processes, which can often be a time-consuming and frustrating experience for policyholders. This streamlined claims process can lead to greater customer satisfaction, fewer disputes, and ultimately lower costs for insurance companies, while also eliminating potential allegations of bias or discrimination.

2. Faster Payouts

Parametric insurance pays out quickly and efficiently after the trigger event occurs, whereas the claims process for a traditional policy can be long and drawn-out, taking weeks or even months to complete. This means that policyholders can receive the funds they need to recover from a loss more quickly, reducing the financial strain on both the policyholder and the insurance company.

3. More Predictable Losses

Since payouts are based on specific events or conditions, insurers can more accurately estimate the potential for an event and the losses that will be associated with those events, allowing them to set premiums accordingly. This can result in more stable revenues and profits for the insurer, as well as more competitive pricing for policyholders.

The Time Is Right for Parametric Insurance

“If parametric insurance offers so many benefits,” you may ask, “why hasn’t it already taken over the industry?”

Two answers: data and technology.

The data required for parametric insurance often has required manual access and/or validation to trigger a claim, largely eroding the benefits of parametric policies for insurers and policyholders. Imagine needing to download and import a spreadsheet of data on seismic activity each day—or worse, needing to manually look up data by zip code on a third-party website after each recorded earthquake.

But the availability of reliable, very granular, near real-time data feeds has significantly improved in the last few years. In fact, the world continues to generate more data than it can retain; of the 64.2 zettabytes of data created, captured, copied and consumed globally in 2020, only 2% of it was saved and retained into 2021. But the types of data insurers need for parametric insurance for claims are now generated and retained by multiple third-party sources and aggregated by a large number of data providers. With so much data, there is virtually no limit to the amount of innovation insurers can bring to their products, protecting policyholders from exposure to everything from natural disasters to cyber attacks to pandemics, and beyond.

And technology, including the ability to integrate with those data aggregators via API, has enabled the promise of touchless parametric policy claims to finally come to fruition. Parametric insurance offerings rely on an underlying technology platform to process large data streams and scan for trigger events of the parametric policies in force. The ability to run these analytics and translate them into actions (e.g., automatic FNOL notifications, claims processing, and payment) is crucial.

Guidewire Solution for Parametric Insurance

In Garmisch, the first of three product releases for 2023, Guidewire announced a new Guidewire Solution for Parametric Insurance. Guidewire Solutions help insurers launch new products quickly and solve complex business challenges in a rapidly deployable manner on Guidewire Cloud. They leverage the combined power of Guidewire Cloud Platform, Guidewire Data Platform, and the Guidewire Marketplace to enable customers to capitalize on specific market opportunities while reducing total cost of ownership and minimizing risk.

With this new Guidewire Solution, you can launch an end-to-end parametric insurance product faster than ever on Guidewire Cloud. Bringing together the power of Advanced Product Designer (for rapid design and delivery of your product) and Integration Gateway (to simplify integrations with data providers for your claim triggers), your new parametric product can be up and running in just a few months. Analytics Manager is then used to define the scheduled triggering events that will initiate a claim and route the information to Guidewire ClaimCenter for processing and payment.

The perfect storm I described in the introduction of this blog post is already showing signs of subsiding, but with new product strategies in place and with Guidewire InsuranceSuite at your back, you’ll be able to weather future storms with confidence and outpace your competitors as you continue along your journey.

For more information on the Garmisch release, I invite you to explore our Release Highlights, visit our website, or read our press release. To explore how the Guidewire Solution for Parametric Insurance can help your business, please reach out to your Customer Success Manager or email us at info@guidewire.com.