The Nationwide Insurance Crisis Affecting Every Region
Regardless of your geographical location across the nation, extremely severe challenges are emerging from insurance coverage issues. Whether your residence is in California, Florida, Texas, or even the Midwest regions, very serious and significant policy cancellations are occurring to insurance contracts. Several examples illustrate this crisis. Property owners have been shocked after experiencing insurance coverage losses. Their insurance carrier provided them with correspondence stating they’re discontinuing coverage. In California, there’s a home insurance disaster because the state underpriced its risks.

Insurance Companies Withdrawing From Markets
Consequently, the companies are closing operations or halting coverage entirely. In Los Angeles, they’re actually pursuing legal action against insurance companies because they suddenly and simultaneously discontinued coverage. And finally, homeowners are caught off-guard because not only did they have costly insurance due to the fact that rebuilding expenses exceeded what their coverage provided. And if you observe the pattern in all of these situations, either you cannot purchase insurance, it’s prohibitively expensive, or it fails to cover what you need to pay for.

Introduction to Parametric Insurance as a Solution
Therefore, what’s the remedy? Well, as standard traditional filed policies become more difficult to obtain or more costly, increasing numbers of insured parties are examining a type of insurance called parametric insurance. Parametric insurance represents a very streamlined type of coverage that doesn’t concern itself with things like how much damage you sustained, underwriting the claim, adjusting the claim, or obtaining estimates. It’s paid simply on a trigger event.

How Parametric Insurance Works: Hurricane Example
For instance, if you purchased parametric insurance for a hurricane, they would simply examine whether there was a hurricane. And there might be parameters like is it a category 2 or three. Is it within 50 miles of your residence or not. Whatever the case. But let’s say the coverage was for a category 3 within 50 miles of your house. All they do at the insurance company is verify was there a category 3 according to the national oceanic atmospheric administration and was it within 50 miles of your house according to the eyewall. If it triggered that event, you receive payment. It’s a flat amount. Doesn’t matter how much damage occurred. It doesn’t even matter if there was no damage whatsoever. You get paid. It’s a trigger event.

Additional Parametric Insurance Examples
Let’s say you buy hail insurance. All they do is examine whether there was hail larger than this much at your location. If there was, they pay you a flat amount. Doesn’t matter if it damaged your house or not. These types of parametric insurance policies can help cover the difference between coverage that maybe isn’t sufficient to rebuild or repair your loss. It may even be usable for somebody who goes without insurance and doesn’t buy insurance because it’s too expensive and you own your home for cash.

Benefits and Applications of Parametric Insurance
It can be an offset. It can help you get relocation expenses. At least provides you some money. It probably won’t completely rebuild your house, but it will be something that can offset some of the losses. Another type of parametric insurance could be fire. If there was a certain type of wildfire near your house or at your zip code, they would pay you. And it’s very inexpensive compared to other types of insurance. It also has usually lower payouts, but it’s a fixed payout.

Life Insurance: The Familiar Example of Parametric Coverage
Many people don’t think they’ve ever heard of parametric insurance, but almost everybody already has one type of parametric insurance and that is life insurance. Life insurance is exactly that. It’s a trigger event. Somebody died and it’s a fixed amount, a million dollars, whatever it is. And they don’t try to adjust the amount based on the value of the person or how severely they died or how much they died.

Comparing Parametric to Traditional Insurance
Like if you have damage to your house, they’re going to determine under a standard policy how much damage there is and how much does it cost to repair it. A parametric policy just pays you a fixed amount no matter what. Life insurance is the same thing. If somebody dies, you get paid a flat amount. So everybody’s familiar with parametric insurance, even if you’re not really connecting the dots.

Strategic Use of Parametric Insurance
So, you can use this same logic of getting a parametric insurance policy to either fill in gaps of coverage from a standard homeowners or commercial policy or even use it as a primary insurance. As long as you understand that you’re taking on more risk than you would if you bought a standard filed policy from an admitted carrier, not through excess and surplus lines.