Rapid payouts based on pre-defined triggers is what makes parametric insurance a great alternative to the traditional system of managing crisis observed Bahaa Abdul Hussein. The really magic behind this innovative approach, however, lies in its unique pricing and underwriting processes.

What are the intricacies of parametric insurance pricing and underwriting? It is time to unveil the factors that determine the cost of your policy and the steps involved in securing coverage.

Pricing Parametric Policies:

Unlike traditional insurance that banks on historical loss data and actuarial tables, parametric pricing takes a data-driven approach. Here’s how it works:

  • Trigger Selection: The type of event being insured (e.g., flood, drought, cyberattack) determines the relevant trigger data source (e.g., rainfall records, cyber breach reports).
  • Model Development: Statistical models are built using historical data to analyze the probability of the trigger occurring and its correlation with potential financial losses.
  • Payout Determination: Based on the chosen trigger and the model’s predictions, pre-defined payout levels are established for different degrees of trigger intensity.
  • Cost Calculation: Premiums are calculated considering the probability of the trigger event, the expected payout size and the insurer’s administrative costs.

Underwriting Parametric Policies:

While relying on objective data, parametric underwriting still involves careful risk assessment:

  • Exposure Evaluation: The underwriter analyzes the insured’s assets, location and operational data to understand their unique risk profile and vulnerability to the chosen trigger.
  • Trigger Validation: The data sources and methodology used to define the trigger are scrutinized for accuracy.
  • Fraud Prevention: The risk of fraudulent trigger manipulation is averted by implementing robust internal controls along with external audits.
  • Regulatory Compliance: Underwriters ensure the policy complies with relevant legal frameworks governing parametric insurance.

Factors Influencing the Price of Your Parametric Policy

Several factors can influence the cost of your parametric insurance policy:

  • Nature of the Trigger: High-frequency, low-impact triggers like rainfall typically result in lower premiums compared to infrequent, high-impact events like earthquakes.
  • Payout Structure: Policies with tiered payouts based on the trigger intensity tend to be more expensive than those with fixed payouts.
  • Coverage Scope: Broader coverage encompassing diverse risks naturally adds to the cost compared to more targeted policies.
  • Data Quality and Source: Reliable and transparent data sources contribute to lower premiums, while less trustworthy sources might mean higher costs.
  • Insurer’s Risk Appetite: Different insurers have varying risk appetites, impacting their pricing strategies and willingness to cover specific risks.

Conclusion: Demystifying the Magic

Disasters are unpredictable, but parametric insurance effectively manages the risks with its data-driven pricing combined with rigorous underwriting.

It is important for businesses to understand the factors which affect pricing to make informed decisions. After all, parametric insurance is an innovative tool to build resilience and weather the storms of an unpredictable world. Thank you for your interest in Bahaa Abdul Hussein blogs. For more information, please visit www.bahaaabdulhussein.com.