Page 41 - Insurance Times July 2019

While we understand the 'cat situations' in case of global
terrorism and climate change, we also must recognise the
"time bomb" that the global ageing is likely to cause as a
challenge, globally.

As identified above, the 3 factors mentioned above have the
potential to be major sources of 'cat events' and the
Insurance Industry has yet gear up to face the challenges
posed by them. There have been discussions between the
stakeholders regarding ways and means of handling such
losses, but we need to arrive at a conclusion and implement
the same.

We need to have solutions and prompt solutions because
Thus, parametric insurance is ideal for low-frequency but
we are losing precious time and that is the point where we
high-intensity losses as in catastrophic perils, weather-
need to examine the role of the Parametric solutions vis a
related risks in agriculture or other economic activities, and
vis the Catastrophic losses/disasters.
risks sought to be covered without sufficient history of
losses captured as insurance-readable data.
Let us begin with what exactly is a parametric solution for
the catastrophic losses.
Unfortunately, today, the governments still rely more on
post event financing of 'cat events', rather than pre event
This is an innovative way of transfer of risk that some of the
financing.
major reinsurers of the world advocate.
The traditional policies pertaining to the fire line of
Based on an agreed factor basis or triggers, the insurance
business, which covers the perils of flood, inundation,
cover becomes operational over a specified area and comes
rains, earthquake, storm, tempest and cyclones etc are
into play in case of breach of the agreed factor or triggers.
good, however they have major drawbacks when it comes
The Wikipedia defines parametric insurance as a type of to claims, both processing and settlement for a larger
insurance that does not indemnify the pure loss, but ex ante number.
agrees to make a payment upon the occurrence of a
triggering event. The triggering event is often a catastrophic This kind of a policy is ideal for individuals, because any and
natural event which may ordinarily precipitate a loss or a every loss under the policy would have to be surveyed and
series of losses. But parametric insurance principles are also assessed by a surveyor and a loss assessor. But how does
applied to Agricultural crop insurance and other normal one assess and survey the inundated town where 100%
risks not of the nature of disaster, if the outcome of the risk houses are insured against the perils of flood and
is correlated to a parameter or an index of parameters. inundation?

Traditional insurance indemnifies the insured party for its Each and every house would have a different level of
specific loss from an insured risk or event, and the insured damage, to begin with and each and every house would
must inform and document the loss to the insurer. The need to be surveyed!
parametric insurance, on the other hand, pays the insured
an agreed, pre-determined amount upon one or more The parametric insurance covers do not have the concept
specified parameters being met. of individual surveys - when the loss is triggered, or the
agreed values breached, depending upon the third party
In case of natural catastrophes, the parameters could be data (could be due to flood, then IMD, could be due to
wind speed, strength of a hurricane, amount of rainfall, the earthquake, then the Richter scale point) is referred to and
magnitude of an earthquake or such similar triggers for a the claim amount is released. This process normally takes
specified geography. about 2-4 weeks time in all.

The Insurance Times, July 2019 41