How Technology Enhancements are Boosting Parametric

December 6, 2023 5 mins

How Technology Enhancements are Boosting Parametric

As data becomes more advanced and precise, so does parametric insurance as a risk solution — a win-win for both risk managers and insurers.

Key Takeaways

Parametric insurance — triggered by a specific occurrence rather than actual loss — is seeing growth thanks to advancements in data and technology.
AI, blockchain, IoT and other advancements will increasingly help insurers deliver more precise protection, pricing and efficient claims processing.
Parametric complements traditional indemnity property coverage, as natural catastrophes continue to drive a hard property market.

While data and analytics are critical in nearly all aspects of risk management and risk transfer, they are especially vital to parametric insurance — and as technology improves, parametric is becoming a more viable and accurate solution for risk buyers.

Unlike traditional cover, parametric is triggered by predetermined third-party parameters — such as a windstorm category within a set geography — rather than an actual loss. The upside is faster payouts without the need for time-consuming assessments and a complementary solution that helps fill the protection gap.

In the face of rising natural catastrophe losses due to climate change, a continued hard property insurance market and growing protection gaps, more risk managers are seeing parametric as a complement to their property risk portfolio. This is particularly true when it comes to natural catastrophe exposures, and the ability to make uninsurable risks insurable.

Better Informed

Data Advancements as a Key Growth Driver

Carriers need to know the likelihood of a loss event to underwrite parametric insurance. They also need to know the precise location and severity of the event to issue claims payments. While past imprecise data caused obstacles, advancements in technology have transformed the parametric market.

“It's important that a parametric triggers when you feel loss pain, but it's equally important that it doesn't trigger when you don't feel pain,” says Peter Lacovara, a managing director in the Alternative Risk Solutions practice at Aon. “The greater precision we can use for structuring, the closer we can get to proxying exactly what you want to cover without paying for anything unwanted.”

With access to advanced data analytics and risk models, as well as a wealth of triggering data from weather stations, seismic sensors and financial markets, insurers are now in the perfect position to expand their parametric programs for risk managers.

Technology advancements are helping fill regional gaps across the globe. For example, if the nearest weather station is over a kilometer away, the difference between what is seen on the ground and what the weather station is reporting can be vast”

Kirstin McMullan

Principal Consultant, Natural Catastrophe, Australia

The most effective parametric policies are triggered by data that closely correlates with a policyholder’s loss. This relies on accurate and localized data that reflects how a loss impacts a customer in their location.

“What we're looking for is the most effective parametric policy that will correlate well with what the client is going to experience,” says Michael Gruetzmacher, head of alternative risk transfer and innovation in Aon’s Risk Capital practice in North America “That's really what we're trying to solve for in designing the solution, and that's how the technology and data can help improve that process.”

Climate-Related Perils and Resulting Data-Enhanced Solutions

Modern data allows for added precision when it comes to determining parametric insurance triggers. Remote sensing technology and satellite data, in particular, play a key role in the evolution of parametric offerings, especially around secondary perils like hail, tornado and wildfire.

“Expansion in the availability of data and the type of data collected allows for the selection of data that most closely mirrors the client’s experience and, more importantly, where the client suffers pain in a specific event,” says Colin Harper, managing director in Aon’s Alternative Risk Transfer and Innovation, Aon Risk Capital practice in North America.

Better Decisions

How Future Technology and Analytics Impact Parametric Insurance

There is a promising future for parametric insurance, which is projected to grow from $11.7 billion in 2021 to $29.3 billion by 2031, at a CAGR of 9.9 percent.²

To get there, advances in technology will be key:

Internet of Things (IoT): Sensors can provide real-time information on weather, seismic activity and other risks, allowing insurers to offer more accurate and timely coverage.
Data analytics and machine learning: Major parametric insurers use data analytics and proprietary data integration algorithms for machine learning risk models to keep costs lower and enable more accurate protection.³
Artificial intelligence (AI): Used to examine vast data sets and anticipate the likelihood of specific events, enhancing risk assessment and pricing accuracy.
Blockchain: Can automatically trigger payouts when a specific event occurs, reducing time and costs associated with claim processing and settlements.⁴

“I have a client with 18,000 locations — and gathering precise information for all of these locations can be quite difficult and complex,” says David Gierski, property broking director, Risk Capital, Europe, the Middle East and Africa. “Accuracy of data information is critical to ensure proper risk assessment, which is not possible without effective technology.”

As data and analytics continue to improve over time, parametric cover will become more efficient and economic as a complement to traditional property coverage — especially where capacity and pricing issues continue in traditional indemnity markets. This will enable businesses to manage risk more effectively, and ultimately achieve improved operational resilience.

Aon’s Thought Leaders

David Gierski

Property Broking Director, Europe, Middle East, Africa
Michael Gruetzmacher

Head of Alternative Risk Transfer and Innovation, North America
Colin Harper

Managing Director for Alternative Risk Transfer and Innovation, North America
Peter Lacovara

Managing Director, Alternative Risk Transfer and Innovation, North America
Kirstin McMullan

Principal Consultant, Natural Catastrophe, Australia
Aurelien Schwachtgen

Director, Client Solutions, Aon Global Risk Consulting, Europe, Middle East, Africa

¹ Overview of Moody's RMS HWind
² Parametric Insurance Market by Type (Natural Catastrophes Insurance, Specialty Insurance, Others), by Industry Vertical
³ The Future Looks Bright for Parametric Insurance
⁴ Parametric Insurance and Why Its Disrupting the Industry

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