Pairing Parametric and Standard Insurance Will Become More Common: East Carolina University Students

By Allen Laman

Parametric insurance experts don’t see the coverage replacing traditional insurance. But how are the specialized products currently used–and how could their adoption expand in the future?

Ten East Carolina students researched, organized, and led a presentation that explored these questions during a recent Academy of Insurance webinar. The roughly one-hour event marked the culmination of the upperclassmen group’s semester-long project in their advanced topics in risk and insurance course.

Those students don’t think parametric will replace standard coverage options, either. Instead, their research has led them to believe that the combination of parametric and traditional policies will provide a more comprehensive and well-rounded coverage strategy that ensures all aspects of a risk event are addressed.

“We believe this approach will be increasingly common as industries start to realize the value in having both types of coverage working alongside one another,” explained Tyler Bonds, one of the presenters.

What Is Parametric Insurance?

Instead of covering the value of actual losses, parametric insurance payments are triggered by predetermined, measurable thresholds, such as a specific amount of rainfall or wind speeds reaching a certain mile per hour within a set distance of a property.

Morgan Windley, another presenter, shared that these triggering events are the core of parametric insurance policies; they set predefined parameters that initiate agreed-upon payment even if the policyholder doesn’t experience a loss. This objective system can minimize moral hazard, and without a claims adjustment process, payouts can be made in days.

“While parametric insurance is fast and efficient, the challenge is defining policies that match real-world risk as closely as possible,” Windley said. She later added that coverages can vary by premium and corresponding payout structure based on measurable event intensity.

Windley noted that parametric insurance has gained traction thanks to catastrophic bonds and other financial instruments that made the products more appealing to insurers and investors. In the past decade, parametric policies have expanded to cover a wider range of triggers, including water levels and wildfires.

The group believes that parametric is becoming more relevant because it can facilitate faster payouts and reduce disputes, among other benefits. Their research citations included an interview with an insurance professional, as well as published articles from trade magazines, insurer websites, and more.

Real-World Examples

The Caribbean Catastrophe Risk Insurance Facility (CCRIF) offers parametric coverage for hurricanes, earthquakes, and heavy rains in the Caribbean. When Hurricane Dorian hit the Bahamas in 2019, CCRIF paid out $11 million; when Hurricane Matthew hit Haiti in 2016, CCRIF paid $23.4 million.

“This system gives vulnerable countries predictable, fast payouts, which helps them respond faster and recover better after disasters,” said presenter Justin Tracy.

Parametric policies can cover soft costs, too.

Katelyn Batten shared another real-world example of a casino that weathered a storm with no physical damage. However, a tree fell across the facility’s only access road and prevented customers from entering for more than three weeks. Because the casino had a parametric insurance policy and the threshold was met, the site’s leadership was able to recover lost revenue and still pay employees.

Index-based livestock insurance covers farmers if droughts kill the grass their livestock feeds on in Kenya and Ethiopia. Satellites monitor green vegetation in these areas, and if the amount of grass drops below a certain level, a payout is triggered. Twenty thousand herders have signed up for the International Livestock Research Institute-created coverage.

Parametric insurance is also gaining traction in the U.S.

Bloomberg reported that Fremont, a California city of 226,000, became the first municipality in the nation to buy its own citywide flood insurance policy last September.

In March, parametric hurricane coverage provider Vortex Weather expanded its supplemental hurricane insurance solutions to Hawaii.

And in February, Aon plc launched a new parametric insurance solution with parametric flood insurance provider Floodbase and Swiss Re Corporate Solutions that is designed to address and mitigate commercial losses from hurricane-related storm surge along the U.S. coast.

Parametric in the Future?

The students believe that parametric policies can be used to fill gaps that traditional policies don’t cover. Students see parametric becoming more standard as a supplement–not a replacement–for traditional insurance. As parametric use grows, the students expect insureds to pair both types of coverage together.

“Traditional insurance works best for situations where you can clearly assess and quantify the damage, like property damage or vehicle accidents,” Bonds said. “But parametric insurance is often ideal for measurable events, where the risk can be easily measured and the payout can happen fast.”

‘While parametric insurance is fast and efficient, the challenge is defining policies that match real-world risk as closely as possible.’

About the Class

The webinar presenters are all enrolled in the senior-level advanced topics in risk and insurance course taught by Professor Brenda Wells. She launched the course 15 years ago to connect students to executive-level professionals, but following the COVID-19 pandemic, Wells restructured the class around a webinar project that emphasizes public speaking and online presentation skills.

Early in the semester, each student gave a presentation to campaign for a topic they believed would be a good fit for a webinar. When it was all said and done, parametric insurance beat per- and polyfluoroalkyl substances (PFAS) in the final round of voting.

A subset of students led a parametric insurance presentation at a separate conference, and the entire class deepened and expanded that presentation for the webinar. Wells, who is the director of ECU’s risk management and insurance program, said she is proud of the group and thought they all did a fantastic job.

Wells said she had heard about parametric insurance, but she didn’t fully understand the purpose of it before seeing her students’ findings. Parametric sounded like high-tech, high-stakes gambling, she said, so seeing their research was a learning experience for her, as well.

A free recording of the full webinar can be found at www.ijacademy.com.

Topics Education