Parametric Insurance

Insurance that cover events that are insured based on a condition (or triggering event) and not on the actual losses sustained is called Parametric Insurance. Offered by brokers such as Marsh, products have been developed for crop insurance and catastrophe insurance applications. Catastrophe insurance depends on accurate measures of things such as wind speed. Crop insurers may cover drought conditions or rain fall on a parametric basis. The concept of parametric insurance has been studied and advanced by the National Insurance Academy in India.

Parametric insurance has been long used by crop insurance. Its newer application is for weather events. The amount paid to the insured is based on the numbers, with low expenses for administration. For example, if the triggering event is wind speeds above 100 miles per hour, the parametric insurance would pay whether or not there are any losses sustained, in the traditional sense. Payouts are quick, automatic and controversy-free for both insured and insurer.

However, accurate, dependable measurements are required to assure policyholders that settlements will be fair and to keep claim expenses low.

RMS (Risk Management Solutions) has hardened weather stations throughout the South to measure wind speed and other data related to hurricanes. The data is used in parametric indices offered by WindX and Paradex and in RMS's weather modeling studies.

A recent National Underwriter article reported that RMS's stations survived Hurricane Ike using power saved from solar panels (one wonders why they don't operate during the storm using wind power?) and back up recording devices if the uplink fails. According to the article 10 of 11 government facilities failed to operate throughout the storm.

The successful operation of the stations during Hurricane Ike should reassure the insurance and capital markets that the capability exists for making the types of measurements needed for parametric insurance related to wind, and encourage more parametric systems to be set up. This type of insurance could be valuable for state wind pools and assigned risk facilities as a way to lower expenses and costs, while providing coverage to coastal homes and businesses.