2025 February 01
What is parametric insurance and how can it help speed up the claims process?
One of the many challenges that was faced during the 2023 Cyclone Gabrielle and Auckland Anniversary weather events, was the time it took for claims to be assessed and paid out.
This was frustrating for all concerned and caused many businesses and homeowners to be in limbo until the traditional processes were carried out.
Parametric insurance is a solution intended to provide immediate financial assistance when severe weather events occur, through a parametric insurance model.
The name ‘parametric’ comes from the fact that a parameter is used to define the hazard threshold, which results in a payout being made.
This type of insurance has been in place for about 20 years however it is now more commonly available due to greater advances in data analytics. The need for it is also greater given the higher frequency of big weather events.
Rather than relying on traditional loss assessment methods, such as submitting a claim for loss or damage to your property, this innovative approach employs predefined weather parameters to trigger compensation.
These parameters can be set around events such as earthquakes, storms, or other weather-related events.
The premium is based on defined criteria, such as the magnitude of an earthquake or the level of rainfall in a storm, and when the defined event occurs.
As an example, a policy would pay a specific agreed amount, in the event of an earthquake in a specific location and within specific intensity levels. The policy will pay based on the event and not in response to damage to insured assets. In this way it can provide coverage for traditionally uninsured property or financial loss.
The limits insured can be relatively small, and as low as $50,000. This can be used for payment of a policy deductible (the amount of the excess paid as part of an insurance claim) or as a stop-gap measure to cover lost revenue after the defined event has occurred, whether the insured has experienced insured property damage or not. The availability of cover is dependent on the ability of the insurer to measure the exposure.
One of the key benefits of having parametric insurance is the speed in which you can receive a payout.
Because the parameters are so clearly defined a payment can often be made within days as the trigger is the event and not the resultant damage.
It is important to note that this does not replace your traditional insurance policy, but is a complement to it.
Traditional insurance is still important to protect your physical assets and provide replacement or repair thereafter. Parametric insurance can give you a quick short-term financial injection to help recover.
There are two insurers offering parametric insurance in New Zealand.
Both of these local solutions are orientated toward earthquake perils and residential property owners.
Options are also available in overseas insurance markets – especially for businesses who wish to utilise it as a method to provide protection against a diverse range of exposures.
If you would like to find out if parametric insurance would work for you, please get in touch with your usual ICIB Brokerweb contact us on insurance@icib.co.nz or 0800 644 444.