Parametric Insurance

A type of insurance for disasters that I've never heard of before.

by Eric Holdeman / July 16, 2019

One reason to go to conferences, or in my case this week, the Natural Hazards Workshop, is to pick up some tidbits of information that I might not already have and — of course — to network.

Here is an item I learned yesterday that was totally new to me ... Parametric Insurance, which is defined as, "a type of insurance that does not indemnify the pure loss, but ex ante agrees to make a payment upon the occurrence of a triggering event. The triggering event is often a catastrophic natural event which may ordinarily precipitate a loss or a series of losses. But parametric insurance principles are also applied to Agricultural crop insurance and other normal risks not of the nature of disaster, if the outcome of the risk is correlated to a parameter or an index of parameters."

The insurance and academic experts on a panel mentioned the insurance as a better alternative to self-insurance for organizations. This being both companies and governments. Their point is that rather than holding money in reserve, spend it, or less of it, on parametric insurance.

I've exhausted my "extensive knowledge" of this topic and recommend you have a discussion with your risk management staff about the concept and if it fits for where you are located. I would think that earthquake- and hurricane-prone locations would be ideal for this type of coverage. 

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