Defining Parametric Insurance and 5 Tips on How to Manage it
Parametric insurance also referred to as “index-based insurance” is a type of coverage that pays out a predetermined amount when specific parameters are met.
The parameters in a parametric policy should be an established metric or index that can be used to measure the event.
This seems straightforward but let us go over a quick refresher of traditional insurance policies so you understand the difference between these and parametric policies.
Understanding Traditional Insurance Policies
With a typical insurance policy, you pay a premium in return for a promise that in the case of a loss, you will receive coverage. With traditional policies there must be a loss assessment and investigation before a payment is made; and there is no guarantee on the amount. The goal of traditional insurance policies is to put the insured back into the position they were in before the loss occurred.
Now that we have this covered, let us look at an example of parametric insurance policies.
How Does Parametric Insurance Work?
Imagine you own a business 30 miles from the coast and you have general liability insurance, but you are worried that in case of a powerful hurricane your policy will not cover the cost of damages.
Because of this, you decide to get a parametric policy. The policy parameters state you will receive a predetermined amount if a category four or higher hurricane hits land within 40 miles of your business.
If all parameters are met, you receive the payment.
But what happens when a category three hurricane hits and is within 40 miles of your business? Because all parameters were not met, you do not receive the payment. This works for all parameters. If a category four hurricane hits but its 41 miles away from your business, you do not get the payment.
Assuming all parameters are met, you get the payment. If all parameters are not met, your parametric policy will not kick in.
Tips for Parametric Policies
When it comes to parametric insurance, it’s important “neither the risk-taker nor the insured are able to influence the event or its reporting,” that’s why things such as natural disasters or acts of God are common in parametric coverage.
- Because many parameters must be met for a parametric policy to kick in, it is important to remember not to use them as standalone policies.
- If you have high deductibles, a parametric insurance policy can help fill the gaps and save money when it’s time to make a claim.
- Make sure the parameter or index is set by a third party. This way there is no need for an investigation and the claims process can take as little as one month.
- Remember, you should make a claim whenever the established parameter or index is met, regardless of damages, because if the parameters are met, you will receive compensation.
Why Keeping Track of Policies is Important
Even though the claims process for your parametric insurance policy is much shorter than with regular insurance policies, it is still important to keep track of the policy. You do not want to experience an event where parameters are met only to realize you do not qualify for payment because your policy expired.
With SmartCompliance you can keep track of all your insurance policies and the policies you require for vendors or third parties you work with. Interested in learning more? Schedule a free product demo!