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What is parametric insurance and why should we care?

Parametric insurance offers financial protection against losses that are often hard, or even impossible, to get insurance for in some instances.

By FC&S Editors | May 29, 2023 at 12:10 AM
Traditional indemnity insurance pays out based on the cost of the loss incurred. Parametric insurance pays out when a predefined loss event occurs and the loss event exceeds a specific dollar or index amount previously agreed to in the policy. Traditional indemnity insurance pays out based on the cost of the loss incurred. Parametric insurance pays out when a predefined loss event occurs and the loss event exceeds a specific dollar or index amount previously agreed to in the policy. (Photo: Talaj/Adobe Stock)

A fact that has been hard to swallow and often debated is that insurance is not available to cover every loss. There are various reasons for this — perhaps the loss cannot be modeled with any degree of predictability to enable insurers to set an appropriate rate for coverage, or the loss is not accidental in nature and could have been prevented, or the loss would be so widespread and catastrophic that insurers could never take in enough premiums to cover all the policyholder losses, which of course can also be said of pandemics.

The COVID-19 pandemic hit businesses and the economy hard, and policyholders were looking to their insurers to recoup some of their financial loss, regardless of whether coverage actually existed on the policy for those losses. Because pandemic coverage is nonexistent on standard insurance policies, the question arose as to who should (and how to) cover the various costs arising from COVID-19 and any similar pandemic in the future. However, this is just one issue — with growing climate change issues, there are stronger and more damaging storms, greater risks of flooding, increasing droughts and wildfires, and a host of other hazards that are difficult if not impossible to insure.

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