Insurance helps people and businesses save money from possible losses stated Bahaa Abdul Hussein. Two main kinds of insurance are traditional indemnity insurance and parametric insurance. Both provide safety, but they work quite differently from each other.

Traditional insurance, called indemnity insurance, pays the person with a policy after something bad happens. The person with insurance tells what was harmed or missing by making a claim. Then, the insurance company checks to verify the claim and determine how much they will pay.

For example, if a storm damages someone’s roof, they claim insurance. This would have details and photos included. The insurance company would send a person to look at the roof and guess how much it will cost to fix. They would do this before they agreed that the claim was good. The one with insurance gets a payout that doesn’t go over their protection limits.

Traditional insurance checks the damages after an event happens. The insurance company must check the losses before giving out money for claims. This process can be long, taking weeks or months to finish.

Parametric insurance, also called index-based insurance, operates differently. It pays out automatically when a predetermined triggering event occurs without needing claims assessments. The payout amount depends on the event’s intensity, not actual damages. Policy terms specify parameters like rainfall levels or wind speeds that trigger payments. More severe events result in higher payouts.

For example, a policy about floods that uses numbers might say the person gets $5,000 if water rises over 2 feet in their area. When the water level reaches that limit, money is immediately given out without checking how good or bad the property is. Parametric policies pay when certain things happen, not because people decide how much to pay based on feeling sorry for losses. This allows quick handling of claims without needing long probes.

Key Differences Between the Two Insurance Types

Here are some of the main differences between traditional indemnity and parametric insurance:

Claims handling – Parametric insurance pays automatically based on event parameters, while traditional insurance requires claims adjustment.

Speed – Parametric claims get paid quickly, while traditional claims can take weeks or months to process.

Basis of payout – Traditional insurance covers actual losses sustained. Parametric payouts depend on event parameters, not losses.

Underwriting – Parametric policies rely more on modeling risks, while traditional underwriting focuses on property attributes.

Customization – Traditional policies can be tailored to a specific property. Parametric policies cover standardized parameters.

Perils covered – Parametric insurance is best for clearly defined risks like floods and storms. Traditional policies can cover a wider range of perils.

Premiums – Parametric premiums may cost less than traditional for some exposures. But for others, traditional insurance could be cheaper.

Benefits of Parametric Insurance

There are a few advantages of parametric insurance versus traditional indemnity coverage:

Fast claims payment – Without the need for adjusters, the payments can occur immediately following the realized event. This avoids insureds paying out money from operations, avoiding cash flow gaps.

Cost cutting – This aids in streamlining underwriting and claims, hence cutting on the expense for the insurers. The savings are then passed to the policyholder by paying lower premiums.

Clear triggers – Payments depend on clear triggers and, therefore, defeat disputes over whether the claim is valid.

Financial stability – Quick claim resolution to stream out the insured with the monies required for repairs and recovery.

Coverage flexibility – Parametric policies can be designed over a particular risk and location basis.

New offerings – Providing coverage to previously uninsurable exposures like pandemics or climate events with parametric insurance.

When Parametric Insurance Works Best

Parametric solutions are ideal for these situations:

  • Natural catastrophes like hurricanes, floods, and earthquakes where losses can be reliably modelled.
  • Businesses with high catastrophe risk and need for quick liquidity after disasters.
  • Low-income regions where traditional insurance is limited or unavailable.
  • Exposures to severe weather events and climate volatility.
  • Pandemic or terrorism losses not covered by standard policies.

Conclusion

It would seem that parametric insurance does offer a promising alternative to the traditional indemnity coverage of certain exposures. The value of paying claims without adjusters associated with the cost is difficult to overestimate. However, its use appears more limited to situations where parameters surrounding neither risk prevention nor potential damage suffered are highly measurable.

In other situations, traditional vehicle insurance may be a more suitable means. Knowing the tradeoffs lets the buyers to choose which kind of coverage that accords to their needs and exposures. With its merits, parametric coverage will likely remain highly disruptive in the insurance industry. Thank you for your interest in Bahaa Abdul Hussein blogs. For more information, please visit www.bahaaabdulhussein.com.