Insurance is a fundamental aspect of managing risk, but traditional insurance policies can have drawbacks. The claims process can be complex and time-consuming, and many policies have exclusions or high deductibles. However, a new type of insurance called parametric insurance offers a simpler and more streamlined approach to coverage.
What is Parametric Insurance?
Parametric insurance is a type of coverage that pays out a predetermined amount based on the occurrence of a specific event, rather than the actual losses sustained. This type of insurance uses a pre-agreed index or parameter to trigger the payment of the claim, such as the magnitude of an earthquake, the wind speed of a hurricane, or the temperature in a specific location. The trigger is objective and transparent, reducing the need for lengthy and expensive claims processes.
Competitive Advantages of Parametric Insurance Products
There are several key features of parametric insurance policies that distinguish them from traditional insurance.
Objectivity
As mentioned above, parametric insurance policies use objective parameters to trigger payment of claims. This means that there is no need for lengthy investigations or disputes about the cause or extent of the loss.
Speed
Reimbursements can be made quickly, often within a matter of days. This can be particularly useful for businesses that need cash flow to recover from a loss quickly.
Flexibility
Parametric insurance products can be designed to cover a wide range of risks, from natural disasters to financial losses, and can be tailored to the specific needs of the policyholder.
Transparency
The parameters used to trigger payment are predefined and transparent, providing greater clarity and certainty for policyholders.
Benefits of Parametric Insurance
Parametric insurance offers several benefits over traditional insurance policies. Let’s go over some of the most important ones.
Faster payouts
Since the trigger for payment is objective, payouts can be made quickly, typically within a matter of days. This can be particularly useful for companies that need cash flow to recover from a loss quickly.
Lower operational costs
Because the claims process is simpler and more streamlined, there are fewer costs associated with parametric insurance policies.
Customizable coverage
Parametric policies can be tailored to the specific needs of the policyholder, providing greater flexibility and customization.
Greater transparency
The parameters used to trigger payment are transparent and agreed upon in advance, providing greater clarity and certainty for policyholders.
Business Rules Engines and Parametric Policies
Business rules engines (BREs) are pluggable pieces of software that enable insurance companies to automate the process of building and managing parametric policies.
Rules engines use business rules, which are powerful “if-then” conditional statements that evaluate data and make decisions based on predefined requirements. In the case of parametric insurance, the rules are used to determine when a trigger event has occurred and to initiate the payment of the claim.
Insurance companies are increasingly turning to business rules engines to build and manage parametric policies in several ways.
Automating Underwriting
Rules engines can be used to automate the underwriting process for parametric policies, reducing the time and cost associated with manual underwriting.
Streamlining the Claims Process
Business rules engines can be used to automate the claims process for parametric policies, reducing the time and cost associated with manual claims processing.
Customizing Policy Terms
Insurers use rules engines to personalize the terms of parametric policies based on the specific needs of the policyholder, providing greater flexibility and customization.
Summary
Parametric insurance is a relatively new type of coverage that offers several benefits over traditional insurance policies, including faster payouts, lower administrative costs, customizable coverage, and greater transparency. Business rules engines can help insurance companies build and manage parametric policies more efficiently, by automating the underwriting and claims process, and customizing policy terms.
It’s important to note that while parametric insurance offers several benefits, it may not be suitable for all types of risks. Some risks may be too complex or require a more traditional approach to coverage. It is essential for insurance companies to evaluate each risk carefully and determine the appropriate coverage strategy for their clients. Nevertheless, parametric insurance, when used correctly, can be an effective tool for managing risk and providing faster and more efficient payouts for policyholders.
