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4 November 2019
Parametric insurance is growing fast, and it’s likely to keep doing so as climate change continues to bite.
While it’s not a complete answer to the range of problems that emerge under climate change scenarios, estimates suggest global parametric gross written premium has reached $US5 billion and is growing by 6-9% every year.
Parametric policies respond differently to traditional insurance. Instead of paying a claim based solely on the insured’s quantifiable losses, payments under parametric policies are typically pre-agreed sums, payable when a specific weather-related trigger occurs.
So if temperatures, windspeed or earthquakes reach a pre-agreed trigger level, and the insured can prove loss, the indemnity kicks in and the previously agreed amount is payable.
It’s clear and simple and removes a lot of complexity in defining losses following weather events.
Axa XL’s parametric policies, which are designed by Axa Climate, are available in Australia for agribusinesses, and the company is also targeting the energy sector and public programs.
“We have big expectations of parametric, and Australia is top of the list,” Francois Lanavere, Head of Business Development for parametric specialist at Axa Climate, tells insuranceNEWS.com.au.
He says that with a parametric policy the payout is typically very fast.
“But the straightforward claims process is not the only benefit. The cover itself is very adjustable. You pre-agree your cover with the risk carrier, and you understand it.
“It is very transparent. You know exactly what you will be paid, and under what circumstances, preventing any misunderstanding between the risk carrier and the insured.”
Mr Lanavere says that while traditional insurance policies can sometimes be hard to understand, Axa XL’s parametric policies are shorter and simpler with clear payout structures.
As the Hayne royal commission hearings showed, damaging disputes can occur when customers fail to understand the cover they have in place, or there is a disagreement over the value of a claim.
Could parametric policies be extended to personal lines and help solve Australian insurance industry issues with disclosure?
It has been argued that parametric policies can help get cover in place for hard-to-insure risks, so could they also be a solution in areas of Australia which are increasingly exposed to natural catastrophes?
Mr Lanavere sounds a note of caution. While in theory parametric cover could extend to all weather-affected clients, it’s not a silver bullet.
“Every time we see a client that is able to measure the impact of climate risks on its activity, it’s a potential prospect,” Mr Lanavere said.
“But parametric insurance is subject to the same principles, constraints and rules as traditional insurance. Insurers rely on the same calculations.
“Therefore, we don’t have more appetite for extreme weather risk than traditional insurance.
“The frequency of a tropical cyclone is the same for traditional and parametric. We see the same frequency of events.”
Parametric insurance can help “bridge the protection gap”, according to Mr Lanavere, but this cannot be done by one insurance company in isolation.
Rather, the industry must work together with public authorities to develop solutions.
“In Australia, most insurance companies stopped writing multi-peril crop insurance because the drought is too severe,” he told insuranceNEWS.com.au.
“When we face a protection gap through extreme weather events, the answer is collective.
“We need the help of public authorities, we need subsidies for premium, we need resilience programs to help homeowners, farmers, or anyone affected by extreme events. Then the insurance industry will be able to offer cover.
“For evident technical reasons an insurance company – parametric or otherwise – cannot insure what is not insurable.”
There are already parametric covers for personal lines in other countries, Mr Lanavere says, and there is also the possibility of covering personal lines customers indirectly through reinsurance.
Axa XL continues to focus on developing parametric policies for Australia’s corporate and public program sectors.
But as parametric covers continue to grow and develop, so too do the possibilities.