Although we tend to think of emerging markets as underinsured, it may surprise you to know the United States also has a sizeable protection gap in the difference between total economic losses and insured losses. The problem is magnified by natural catastrophes. Windstorms and earthquakes can cause damage to a wide range of assets that aren’t insured, forcing people to pay for losses that aren’t covered.
In developing nations, parametric insurance is helping close the gap by providing rapid payouts with minimal claims intervention. One such example is a business interruption coverage offered by MiCRO and Swiss Re in Guatemala. That model can be adapted in developed nations and is already showing tremendous potential in places where extreme weather events are a statistical certainty.
Recognizing that parametric insurance has brought a level of stability to developing economies, Assured Risk Cover, an investor-funded Silicon Valley-based startup, set out to design a parametric hurricane policy for the U.S. market. Whether it’s a landslide in Guatemala or a hurricane in Florida, the emotional toll is the same: The first 24 to 48 hours after a catastrophe are stressful for residents. An effective way to help reduce the stress (emotional and financial) is to provide quick access to funds that assist in covering what’s excluded from a Homeowners policy.
How it works
For a small premium, a homeowner or renter can purchase a policy with limits of $1,000 to $15,000. The applicants provide their name and address and choose a limit. If a hurricane strikes within pre-established parameters and they suffer an economic loss, they collect their payment within 24–48 hours after the end of the storm with no claims adjustment hassle. They receive an electronic deposit and can use the money to pay for such things as temporary housing, debris removal and repairs to uninsured property.
Other eligible expenses include the following:
- Removal of felled trees on the insured’s property or neighboring property.
- Repairs to outdoor property (fences, light poles, trees, shrubs, plants, lawns, fountains, gazebos or entry monuments and structures).
- Temporary power restoration.
- Increased costs due to the enforcement of local government ordinances.
- Increased living expenses.
- Fair rental value of any portion of a dwelling rented to others.
Proceeds from the policy also may be used to pay for losses under the deductible on another policy. Even though deductibles on hurricane policies sold in eligible states tend to be low — from 1% to 5% — there’s an advantage to paying the deductible immediately so a contractor can be hired and restoration started sooner.
More money flowing to residents and businesses at a faster rate can alleviate the paralysis that plagues communities and economies in the wake of a disaster. And like traditional insurance policies, no government funding or relief is necessary because 100% of the risk is borne by policyholders and participating insurers.
Building a risk-based model
The parametric model is based on the hurricane’s location and severity.
To understand the statistical probabilities, we set out to simulate how actual hurricanes pass over the Atlantic, Gulf of Mexico and on land. Starting with data from the National Oceania and Atmospheric Administration that goes back to 1851, we developed a substantive hurricane track set.
As for severity, we wanted to know how much damage could be expected from varying levels of hurricanes. So we looked at how nuclear facilities are designed to withstand hurricane strength winds and adapted that approach to our proprietary risk model.
After a detailed set of analyses and calculations, what emerged was a robust risk-based model to price coverage for individual addresses and determine the extreme loss risk for portfolios of locations. This model can be replicated for other perils across multiple locations, further increasing the odds of success in eliminating the protection gap.
Alok Jha is founder and CEO of Assured Risk Cover. He can be reached at email@example.com. Tony Manzitto is executive vice president and COO of Topa Insurance Group. He can be reached at firstname.lastname@example.org. Opinions expressed are the author's own.