Page 29 - Insurance Times February 2023

Emergence of

Parametric

Insurance Swagata Karmakar

M.A. (Economics),
International Post Graduate
Diploma in Insurance-IIRM,
Hyderabad, F.I.I.I.

The event, or "parameter," is often indicated by an established and authoritative index for that
type of event, such as the Richter scale for earthquake intensity or the Saffir-Simpson scale for
hurricanes or Knot i.e., nautical mile per hour for storm.

nsurance is an intangible product. It has always been a certain time periods and geographic areas. Even customized
I tough product to manufacture (underwrite) and more policy can be developed based on wind speeds, storm surge,
tough to sell. But there is a glimmer of change on the
rainfall (or lack thereof), and other factors, both natural and
human-driven, alone or in combination.A set of parameters
horizon, in the form of Parametric Insurance.
define whether an event occurred and its intensity, entirely
Recently, Mr. Debasish Panda, Chairman, IRDAI while
removing the need for a claims adjuster as well as the long
speaking at 16th Health Insurance Summit 2022 in New Delhi
and tedious process of submitting and re-submitting of
suggested bringing more parametric insurance products in
documents to substantiate an insurance claim. It offers faster
the Indian Market which has created much excitement.
payouts than traditional insurance because it is quick to verify
if the objectively observable trigger even passed the threshold
What is Parametric Insurance: specified in the policy.
Parametric Insurance is an agreement under which an entity
Illustrations:
assuming risk (the "insurer") agrees to pay the indemnitee
(the "insured") an agreed amount upon the occurrence of a 1) Let us consider an asset situated in coastal area receives
specified event, such as an earthquake or hurricane or storm significant damage from a category 4 storm with winds
of specified intensity. The event, or "parameter," is often gusting to 160 kilometer per hour. The losses fall within
indicated by an established and authoritative index for that the Insured's property policy deductible. Hence no claim
type of event, such as the Richter scale for earthquake is admissible under Property Insurance. But the damage
intensity or the Saffir-Simpson scale for hurricanes or Knot to ancillary services halts production and leads to increase
i.e., nautical mile per hour for storm. For that reason, in business interruption cost. If the Insured has Business
parametric coverage is also called "index-based insurance." Interruption Insurance, then the claim would be
admissible under this section but the settlement process
Parameters can be defined by other objective factors, such would be lengthy, leaving insured with less liquidity in
as the extent of physical damage, and are typically limited to the meantime.

26 January 2023 The Insurance Times