Climate change pushes parametric policies to the fore

More Australian insureds are considering parametric insurance options to help address the increasing cost of traditional policies and hazards brought about by climate change, industry consulting firm Xceedance says.

Redicova and Descartes are examples of underwriting agencies offering parametric cover in the Australian market, says Xceedance Australia Client Executive Martin Jones.

North Queensland-based Redicova provides a Lloyd’s-backed parametric wind insurance product triggered when the Bureau of Meteorology records a severe tropical cyclone at an insured location. Payment is made regardless of whether the insured suffered a loss.

MD Karen Hardy says Redicova is not designed to replace traditional insurance, such as home, business, strata or farm, but to complement it.

Descartes Underwriting began offering parametric frost insurance to local farmers last year. Its Paris-based parent company was established to provide a data-driven, parametric alternative against climate and emerging risks. Descartes has expanded its parametric products to cover natural catastrophes, crop yield, bushfires, hail and more, using satellite imagery, radar or smart monitoring devices installed at insured properties and climate pattern data to individually price risks.

Parametric insurance can fill some of the gaps and limitations of indemnity products, Mr Jones says, and be used as a top-up for under-deductible losses, or operate as an excess-of-loss cover.

“Increased natural disasters and the advent of artificial intelligence and other technological advances is changing the nature of core insurance products,” he said. “The advantage of parametric insurance is that it lowers the expense ratio for insurers and speeds the claims disbursement process for policyholders.”

Parametric products are powered by advanced technology and based on an external index being triggered, with claims settled according to a pre-agreed scale. Once the trigger threshold is reached, payment is made with no requirement for loss adjusters to attend.

Parametric triggers might be a lack of rainfall over a specified period in agriculture, or storms of pre-determined wind speeds.

Specialist agencies offer parametric products for cyclones, floods, frost and hail, among other classes, and some insurers provide them as an adjunct to traditional covers, or to expand their market share into areas where traditional insurance is not readily available.