AM Best predicts growth in parametric products
The increased frequency of weather events, like severe storms and flooding, pose a real threat to communities which may struggle to find sufficient protection through traditional insurance markets.
As insurers and their customers consider solutions to this problem and other emerging risks, AM Best expects parametric products to represent a growing share of the insurance world.
A new Best's Special Report, "Parametric Solutions Offer Risk Management and Loss Mitigation Opportunities", explores ways that parametric insurance products can supply insureds with more objectivity, simplicity, transparency, and certainty of claims settlement, and can supplement traditional indemnity insurance products.
According to the report, the utilisation of parametric covers is expected to expand beyond the property and casualty space, into management liability, financial lines, and cyber. New emerging risks continue to arise, some of which are well placed to be covered by parametric solutions.
“Extreme heat is becoming an increasingly serious health issue globally,” the report pointed out. “Should local governments have access to cash in instances where temperatures exceed a certain threshold, this may allow them to set up public cooling stations which would benefit those that have limited access to cool spaces.”
AM Best said that cyber is another area where parametric insurance may be able to complement cover that is already available through traditional cyber insurance covers. A higher usage of cloud computing makes the risks and costs associated with cloud downtime, like lost revenue and depleted productivity, greater.
Aggregation of potential downtime losses for cybers insurers is complex to determine, the rating agency pointed out, and may be excluded from contracts, accordingly. With a parametric product, should cloud downtime exceed a specified threshold this would trigger a swift payout without having to undergo a claims adjusting process.
Although predominately a feature in developing markets, parametric covers for natural disasters may also become more attractive in mature markets which are confronted with the impacts of changing climate trends.
The increased frequency of weather events, like severe storms and flooding, pose a real threat to communities which may struggle to find sufficient protection through traditional insurance markets.
As new risks emerge, AM Best expects the industry to leverage innovation and drive parametric solutions to represent a growing share of the insurance world.
