As volatile weather becomes more frequent, parametric insurance use is growing as it pays on a specific parameter rather than on the damage.
With recent advancements in blockchain technology, real-time weather data can be readily accessed and is driving renewed interest in parametric insurance. Parametric insurance is a is different than traditional property or casualty insurance in that it pays on a specific parameter occurring rather than claims focusing on the damage itself. With more frequent and volatile natural disasters causing billions of dollars in global economic losses just last year, insurance covered only a small portion of that amount and parametric insurance can help businesses mitigate risks. It is another way for businesses to minimize risks and complement existing property insurance policies. As weather patterns continue to be unpredictable and extreme weather events are predicted to increase, property insurance is one business category that is seeing changes in buying trends.
Unlike traditional property coverage, parametric insurance doesn’t indemnify the actual loss, but issues a set payment when an extreme weather event happens, like hail, hurricanes, tornadoes, or floods. Although parametric insurance has been available for the last 20 years, it isn’t until recently that it garnered interest because there wasn’t a reliable infrastructure to effectively fulfill contractual agreements when extreme weather events occurred. New blockchain technology and smart contracts have now enhanced the scale and capabilities to make it possible.
Advancement in weather analytics is what makes it reliable. Hyperlocal weather data, such as remote sensing, the internet of things, high resolution gridded data, and advanced algorithms allow for parameters to be measured on a granular scale, lending credibility to the verification that these parameterized events occurred.
Blockchain oracles can bridge blockchains with live, real-world data, like weather forecasts. Because of this technology, smart contracts can interface directly with traditional APIs, and data sourced from outside the blockchain, using it to trigger a parametric insurance smart contract. So, in the case of weather, a weather API can be placed directly onto blockchain-based smart contracts and include weather information like temperature, precipitation, wind speed and information on extreme weather like hurricanes, tornadoes, and hail.
The biggest benefits of parametric insurance are faster payouts, flexibility, and the option to get coverage for what is known as a “difficult to model” loss. A parametric policy pays out when a specified event reaches an agreed-upon threshold. That payment is distributed in full regardless of actual damage. There is no claim filing required, or the need for insurance adjusters to be involved.
Parametric policies are tailored for a specific event, such as the amount of rainfall during a live event. While it can be used to cover a variety of events, including pandemic-related loss, extreme weather events are a good fit for this type of insurance. For example, earlier this year in Rhode Island, when Tropical Storm Henri made landfall, the storm had sustained winds of 60 mph, which isn’t an extraordinary wind speed for that area. But, had Henri made landfall with its maximum sustained wind speed of 79 mph and a business along the coast had a parametric insurance policy that triggered at 75 miles per hour, then they would have automatically received a payout within days of the event.
Recently, the Caribbean Catastrophe Risk Insurance Facility, which was established as the world’s first multi-country risk pool using parametric insurance, made a payment of $2.5 million to Barbados under its tropical cyclone and excess rainfall policies in response to Hurricane Elsa. The group’s payments typically are made in as little as 14 days and has paid a total of approximately $203 million since the group’s inception in 2007, making it an effective way for governments to work to get infrastructure restored as quickly as possible.
Extreme weather impacts every industry, either directly or indirectly, leading to increased costs, or possibly disappointing earnings. Although extreme weather and other natural disasters are uncontrollable and unavoidable, businesses can mitigate risk with parametric insurance and reliable weather analytics.
About the Author
Renny Vandewege is the VP of Weather Operations for DTN, where he is responsible for developing strategic direction for DTN’s weather business serving the Aviation, Energy, Offshore, Shipping, Transportation, and Sports & Safety markets as well as providing leadership to DTN’s 200+ operational meteorologists across weather forecast rooms globally.