Does Parametric Fix The Home Insurance Rate Crisis?

  • June 6, 2024
  • 6 min read

Insurance Market Challenges and Parametric Insurance Introduction
So in many parts of the country there are very, very extreme restrictions on insurance. Sometimes companies are pulling out of the market, they’re non-renewing people. You’re having issues in Florida where windstorm is going through the roof. You have issues in California with fire insurance. Even other parts of the central United States are having issues with coverages because of tornadoes and hail storms.

What is Parametric Insurance?
What is this doing to the insurance market? Well, if you have coverage that’s difficult to place for your residents or for your business, one option is to look at a type of insurance called parametric insurance. Parametric is an event-based triggered insurance where instead of having a specific loss or claim, if a certain event happens, you get paid. As an example, you can purchase parametric insurance that will pay you a certain amount of money, fixed dollar amount, if there’s a hail storm that hits within 40 miles of your house and the hail is bigger than, let’s say, a quarter inch. And these terms can be very customized to your needs.

Customizable Policies
Or let’s say if you are in Florida, you can have a parametric policy that says we will pay out $800,000 if a named storm with winds in excess of 90 M/hour comes within 20 miles of your zip code. And it can be very customized.

Advantages of Parametric Insurance
A couple of advantages of parametric insurance: one is you don’t have to wait for a claims adjuster to come look at your property to see the damage, get estimates on the roof, get estimates on repair, and that can take weeks or months. All they do is verify that the trigger occurred. There was a storm, it was a named storm, the winds are 90 M/hour, here’s your check. A lot of times, you can get paid a lot faster using that underwriting or that claims adjusting process than you can through a traditional damage-based process.

No Negotiations Needed
In addition, there’s no quibbling over the amount. The amount is in the policy. If you have a roof ripped off your house, you might have to negotiate with the roofing company, the insurance company. They say it’s going to cost more, they don’t want to pay as much. There’s none of that with parametric. It’s a dollar amount.

Coverage Without Damage Requirement
At the same time, you’re also going to have coverage even if you have no damage. The coverage does not specify that you have to have damage from this loss. It’s just that the event happened.

Considerations and Challenges
Sounds too good to be true, right? Well, there’s pros and cons. Number one is if you have a mortgage on your property, you have to get your mortgage company to approve that kind of coverage, which means you probably have to get elevated coverage. Make sure the deductibles aren’t too much, meaning that the amount you’re getting covered for is sufficient to rebuild your house. You also have to make sure that the insurance company approves of the company. They normally want an A-rated and they’ll probably have to deal with it.

Costs and Affordability
But if you have no mortgage on your house, rather than going uninsured or bare, you might as well get a parametric policy that covers something, right? In addition, one of the other downsides is the cost. Unless you are a high net worth or private client level type of homeowner, the cost may not make sense. Right? If you have a four, five, or $600,000 house, parametric coverage may not be a viable option, especially as a standalone. Maybe you want to buy it as a separate policy for a small amount. Maybe you get one for 20,000 or 30,000 instead of trying to cover your whole house. Maybe it’s a supplemental policy.

High Net Worth Considerations
But if you’re high net worth with a property into the seven figures, one, two, or three million or more, you may find that parametric coverage for that type of event is a very good way to supplement the risk, mitigate the risk so if something does happen, you’re financially balanced out.

Differences from Traditional Coverage
And the other difference between parametric coverage and traditional loss-based coverage is on loss-based coverage, it’s not designed to be a windfall, right? You can’t benefit from it. Parametric coverage, you could have a payout that’s actually more than your damage because it’s more about probability and viability for the insurance company.

Parametric Insurance in Practice
It’s a relatively new type of inclusion in homeowners markets or property coverage markets. It can be done with business as well. But it’s not a new idea. Many people already have a parametric policy and don’t even recognize it. It’s called life insurance. Life insurance technically is a parametric type of coverage. The only event is a person dies, they get paid. It doesn’t matter how much the loss was, what they need, what their family needs. It’s a fixed amount of money.

Business Applications
So parametric insurance is actually very common. It’s one of the most common types of insurance in the life industry. In property coverage and other types of coverages, even business, it has been less used. But in the current hard market for insurance, it may be a more common thing to look at. Even in business insurance, you can look at it as a hedge against certain events. Let’s say if you are a swimming pool company and you know that more people buy pools when the weather is warmer. If you are in an area that could go hot or cold, maybe you’re in central California, you can buy parametric coverage so that if the average temperature does not go above a certain amount for two seasons, you get a payout. That way it covers your losses for not installing as many pools.

Customized Solutions
You can create parametric scenarios for almost any situation you could think of with business. So work with your broker, work with your agent. Make sure they’re familiar with this and also make sure that you understand that the terms of that policy match exactly what you’re trying to accomplish. And if you have more questions, you can reach us on our website. We can even do a consultation with you to discuss what type of options you could use for a parametric risk management policy.

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