Parametric Insurance

Posted by on Jun 3, 2013 in General Insurance, Life Insurance, Your Insurance Question Blog

When disaster strikes your area, you need money and you need it fast. The ensuing destruction can mean no shelter, food or water for you and other victims of hurricanes or earthquakes. If insurance policies can only distribute money after losses are assessed, then it’s going to take time, something disaster victims don’t always have.

The solution to this problem involves the use of parametric triggers, which are specified intensities of a natural disaster in certain locations measured by an independent agency. Claims can be paid much quicker since these triggers can be easily assessed as opposed to actual losses, which have to be quantified. This means prompt budgetary support to governments of major natural disasters areas and quick relief to the victims of the area.

In Alabama, home of the first parametric cover afforded to a U.S. state government fund, the state can receive funds based on wind speeds alone. By covering immediate costs, governments and ultimately taxpayers won’t be burdened with the cost of emergency expenses and reconstruction long after the disaster has passed. These solutions are appropriate for governments of all sizes and can be applied to US states that have an economic exposure to catastrophes whether they are hurricanes, wildfires or earthquakes, among others. 

Parametric insurance principles are also applied to agricultural crop insurance and other normal risk not of the typical nature of the disaster. Let’s say your crops for the season are ruined by a hurricane. Thanks to your policy, you’re covered when there is risk to agriculture and other economic activities due to weather-related activity. Parametric insurance policies also cover risks that don’t provide a sufficient history of losses captured as insurance readable data.

Parametric insurance is not ideal for everyone, but in areas with changeable climates, disaster can strike at any time. For areas prone to catastrophic perils without regularity but with the potential for a high cost of damages, parametric insurance is the ultimate insurance policy.

If you have any questions about parametric insurance, contact one of our experts here.

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