30 June 2020Actuarial & underwriting

Parametric insurance to increase its share of the indemnity insurance market: Machine Cover

Parametric insurance is set to increase its share of the indemnity insurance market in coming years, reflecting the growing importance of intangible assets like intellectual property as components of company valuations.

That is the view of Inder-Jeet Gujral, founder and chief executive officer at Machine Cover. “Parametric insurance is going to comprise a larger share of the indemnity insurance market, as there are classes of risk that are otherwise uninsurable,” explained Gujral. “The annual worldwide P&C market is currently around $1500 billion, so even if parametric insurance grows to be only 10 percent, that is still a huge number.”

The COVID-19 pandemic has created a situation where many companies are seeing precipitous drops in revenue for reasons that are entirely out of their control, and may not even be directly related to the pandemic itself, but to the government intervention that followed it.

Many companies have found their current insurance coverage has not fully protected them from this loss of revenues, and are looking for ways to ensure they are better prepared for similar events in the future.

Gujral believes parametric insurance is the solution these companies are looking for, and  recently announced Machine Cover is developing what it believes to be the world’s first parametric pandemic coverage. 

“Parametric pandemic insurance is not something we came up with, we developed it in response to a surge of interest in the last few months,” he said. “But in fact the product doesn’t have to be used for pandemics at all, it can be used in many different scenarios where there is a sharp fall in economic activity.”

For example, if a department store usually has 5000 cars passing within 1km of it per hour, but that drops to 600, then clearly that is an indication of abnormal activity and that could be used as the trigger to payout. Other triggers can also be used, such as a fall in sales by a certain percentage.

Gujral said: “The great thing about parametric insurance is it does not matter to us what the business is. It eliminates the traditional underwriting process and is relatively inexpensive to structure.”

Gujral does not see parametric insurance as a replacement for other forms of insurance, but as a complement to it. “Even in the case of a pandemic, we would assume the government would step in with its own support, this product just buys time for businesses until that happens. It is a hedge against a bad event,” Gujral said.

Machine Cover envisages different forms of distribution for its parametric cover, depending on the region, and is in negotiations with a number of different carriers with a view to offering them exclusive licensing rights in certain territories.

“One carrier might decide to offer it as a standalone product to supplement its other policies, others might incorporate it into existing policies and use it as a way to increase renewals,” he said.