Parametric Insurance
Background
Parametric insurance is a non-traditional insurance product that offers pre-specified payouts based on triggering events, bypassing claim damage assessment. For example, an IoT dongle monitors the temperature and mechanisms of a refrigerated food truck and the insurance pays if the cold chain is broken. As another example, a weather station records that rain exceeds a certain level and triggers flood insurance payment; or the weather station records hurricane wind measurement at a certain level and triggers a homeowners insurance payment.
Parametric insurance has the potential to revolutionize the insurance industry. Assessment of whether a triggering event occurred can often be performed in minutes. However, the pre-defined payment may not match the cost of actual losses, and the insured needs to understand that risk.
Proofs of concept indicate feasibility from a technological view but show large pricing differences between similar offerings. Thus, the actuarial pricing of the underlying risk lacks robustness. For this emerging market to gain acceptance, actuarial pricing needs to become robust, products need to fit customers’ needs, and regulators need to gain confidence in all aspects of the products.
Research Objective and Deliverables
This research would identify and address all the barriers that are holding back the development of parametric insurance in North American markets. Results will be outlined in a report that articulates product design considerations with supporting actuarial pricing and underwriting guidelines.
Target Audience and Impact
Actuaries and other insurance professionals who are designing and pricing parametric insurance. As well as regulators who manage parametric insurance.
Estimated Cost
$100,000
Estimated Timeline
Approximately 12 months