Page 42 - Insurance Times July 2024

Until recently, traditional indemnity-based insurance of difficult-to-insure exposures. Unlike traditional policies
contracts have been predominant in the protection that pay claims based on the damage, parametric policies
landscape. These contracts compensate policyholders for pay claims based on objective triggers. Parametric insurance
actual financial losses incurred due to covered events or contracts pay out a predetermined amount of money upon
risks. NDBI coverage has been offered by insurers either as the occurrence of a predefined event, as measured by a
standalone policies or as add-ons to existing BI or property predefined index or parameter. This provides policyholders
insurance policies. Insurers have provided coverage for with quicker access to funds in the event of a covered loss.
specific NDBI risks with lower limits, selectively based on the This rapid response can be crucial for businesses facing
type of peril, industry, and company. In some instances, NDBI NDBI-related disruptions, allowing them to mitigate
coverage is included as sub-limited coverage within broader financial losses and expedite recovery efforts However, the
BI policies. biggest challenge in creating parametric contracts lies in
identifying the risk, defining appropriate predictor variables,
However, the claims settlement process in traditional and establishing effective ways of monitoring it.
indemnity-based policies can be complex and lengthy, which
may not be ideal for addressing the urgent cash With the advent of new age technologies enabling the
requirements associated with NDBI losses. The challenges sourcing of granular, reliable, real-time data and the
processing of this data for deriving risk insights, the
associated with managing NDBI risks through indemnity-
based insurance have led to many of these risks being landscape of protection is undergoing transformative
considered uninsurable, resulting in significant insurance evolution. Advancements in big data, internet-of-things-
enabled connected devices, satellite data, geographic
gaps. In recent years, parametric insurance has emerged
as a suitable alternative for providing coverage for difficult- information systems, artificial intelligence, and machine
to-manage risks such as NDBI. learning are providing insurers with a new perspective on
risk management. The availability of real-time risk data and
the ability to derive intelligence from it allow insurers to
Emerging Parametric Solutions
create parametric contracts tailored to specific industries
So far, the insurance industry has approached NDBI and companies, considering their unique business models.
exposures in an extremely selective manner. Given the This capability is now extending to risk areas where
complexity and uniqueness of NDBI risks, there are no one- traditional indemnity-based insurance struggled to provide
size-fits-all solutions available. Providing coverage tailored coverage. Using these technologies, insurers can define a
to each peril, industry, and company requires a different wide range of parameters or indices for different risks and
approach to risk identification and assessment. As a result, perils, which can serve as parametric triggers. This approach
NDBI policies are typically more customized than other enables insurers to offer more flexible and tailored coverage
insurance products. To create coverage for NDBI risks, options that better align with the evolving needs of
insurers and companies must first understand the types of businesses and industries.
non-physical losses the business is vulnerable to and their
impact on cash flow and revenue. The advantage of parametric solutions lies in their ability to
offer insurers the flexibility to design bespoke risk transfer
Following this understanding, they need to assess whether solutions for niche areas. Given that NDBI risks involve
these risks are insurable and, if so, at what cost. Therefore, unknowns, uniqueness, and novelty that insurers must
it is unlikely for businesses to find off-the-shelf solutions that contend with when defining coverage, parametric contracts
perfectly fit their needs when it comes to NDBI coverage. help insurers manage their risk exposure by limiting the
Instead, a collaborative approach between insurers and coverage amount. This makes parametric products an
businesses is necessary to tailor coverage to specific risk effective instrument for expanding the limits of insurability
exposures and ensure adequate protection against NDBI with respect to NDBI cover.
events.
Over the last few years, innovative parametric solutions have
Given the challenges in creating traditional insurance emerged in the market, addressing the gaps in protecting
products for NDBI, parametric or index-based insurance is earnings and cash flow. Here are some scenarios where
emerging as an efficient option to enhance the insurability innovative coverage is provided for NDBI.

38 July 2024 The Insurance Times