Insight

The Rise of Parametric Insurance

7 May 2024
Insight

The Rise of Parametric Insurance

a flood sign next to a flooded area

Parametric insurance is a non-traditional form of insurance. With the rise in technology and different ways to measure risks, the demand for parametric insurance is on the rise. Funding for this kind of insurance has more than quadrupled since 2020 and is only looking to increase more over time.

Parametric insurance products offer pre-agreed pay-outs based on specific triggers being met. These kinds of products come in particularly handy when it comes to natural catastophes, such as flooding. We have been working closely with the company FloodFlash. They use parametric insurance to provide flood cover to businesses who need to get help for the business fast in the event of an emergency. Clients choose up to three depths and payout values. FloodFlash install a smart sensor on the outside of a client’s property to measure water depth. The sensor sends data to FloodFlash HQ regularly. Once water is detected, the client and FloodFlash are informed, so that the client can put in any resilience plans they may have (e.g. raising stock, deploying flood barriers). If and when flooding reaches the client’s selected trigger depth, the claim begins. All clients need to do is provide their bank details. Claims are paid within days of the flood reaching the selected trigger depth – their record is under 6 hours!

Parametric insurance has been vital in the protection of not just properties across the world, but also nature itself, including the coral reefs in Quintana Roo, Mexico. With the growing threat of climate change, the reef has unfortunately been subjected to further damage from pollution, rising ocean temperatures, storm damage and increasing tourist activities. A recent study indicated the importance of the reed to the local environment and community, showing that the reef prevents $42 million in damage to buildings and $20.8 million in damage to hotels annually.

In an attempt to keep a track of further damages to the reef and to the local area, Quintana Roo created the Coastal Management Trust Fund to purchase a parametric insurance policy for protecting and restoring the reef. The insurance policy was triggered during Hurricane Delta in October 2020, for which the Coastal Management Trust Fund received $850,000.

It’s clear that parametric insurance is vital to the insurance industry and the need for it will only grow in the future. At Vista, we are committed to researching new and improved methods of insurance like parametric insurance to best help our clients find the policies that work for them.