Parametric insurance has become popular and is fast-growing thanks to its many benefits observed Bahaa Abdul Hussein. While talking about insurance, it is important to discuss ethics. What are the ethical issues related to parametric insurance? How can both efficiency and fairness be balanced while selling parametric insurance products? We look at all aspects related to these issues.
Ethics and parametric insurance
Parametric insurance is different from traditional insurance because payout is based not on loss assessment but on an event being triggered. This unique feature makes this form of insurance ideally suited for insuring against natural disasters. It is highly beneficial for farmers who are subject to the vagaries of nature.
There are ethical issues connected with parametric insurance. Here is an overview of the same:
- In traditional insurance, the payment to be made is decided based on assessment of losses or damages. In parametric insurance, the amount to be paid is decided beforehand. Once a particular event (eg: earthquake) occurs, the payment happens automatically. This system reduces moral hazard. The concept of moral hazard is that an insured person may behave in a risky way to earn more from insurance. This aspect is not possible since the gain from parametric insurance is pre-decided.
- A major ethical issue in parametric insurance is that the payment is not related to losses. It is possible that the insured person suffers more losses, but does not get adequate payout. It is also possible that the insured person’s losses are negligible and gets paid more. It is not easy to determine the appropriate payout.
- Discrimination is a potential ethical issue in parametric insurance. A particular area could be discriminated and people living there could be charged higher premiums even though the risk of an event occurring is not high. It is possible that some groups of people could be discriminated by insurers, which is a matter for concern.
- People who are vulnerable may be exploited. For instance, if payout is linked to number of deaths in an area ethical issues arise. The policyholder may then stop food and medical care to the area to increase the number of deaths and to get a higher payout. This can be a serious ethical issue.
Parametric insurance is an insurance form that balances efficiency and fairness. It ensures efficiency for the insurer while ensuring fairness at the same time. Its implementation needs to be done in an ethical manner without violating ethical norms. Thank you for your interest in Bahaa Abdul Hussein blogs. For more information, please visit www.bahaaabdulhussein.com.