Smart Ecosystems and Parametric Insurance: A Glimpse into Future
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A parametric insurance product is an insurance contract whose final payout or settlement is defined by specific weather or geological metrics. These parameters include average temperature, rainfall above a certain time frame, or the magnitude of an earthquake or a windstorm. Unlike traditional insurance, where payouts are based on individual loss assessments, parametric insurance payments are linked to a correlated index measurement. As a result, there is a possibility of a discrepancy between the claims settled through parametric insurance and the actual losses of the insured, commonly known as basis risk.
The parametric model simplifies the process of risk pricing for insurers and allows advanced and transparent products. Generally, insured parties do not need to submit a claim or provide proof of loss because the payout is automatic. As per the AMR’s analysis, the parametric insurance market is predicted to register an impressive CAGR of 6.6% by 2033.
Power of technological evolution in transforming the parametric insurance industry
Improvements in data and emerging AI-driven technologies have made parametric insurance products more resilient. However, underwriting models are improving and modernizing with satellite and radar technology, machine learning, and advanced physics.
The advent of the latest technologies including IoT and AI is estimated to contribute to the growth of the parametric insurance sector. New technologies help companies better understand climate risks and new threats. Furthermore, the usage of IoT-based warning technology alerts clients regarding potential hazards and protects them from costly damages. Service providers also analyze current trends and discover advanced models to sustain the evolving industry.
On the other hand, large language models (LLM) have the potential to revolutionize the underwriting process. LLMs rapidly assess vast amounts of data comprising historical claims or events, which allows underwriters to forecast future claims.
What does the future hold for the industry?
Climate change, geopolitical tensions, and cyber-attacks increase the frequency and severity of risk factors. Parametric coverages are ideal for enhancing resilience against unpredictable risks and losses. The growth of digital technologies, sensors, and AI systems is projected to initiate the evolution of smart ecosystems and connected insurance models. There are further opportunities for product innovation by combining emerging models like usage-based, on-demand, peer-to-peer offerings, and new consumer segments, including gig workers.
Safehub and LM Re collaborated to offer sensor-based parametric coverage
In October 2024, the reinsurance subsidiary of Liberty Mutual, LM Re, and a technology supplier in risk management and seismic sensor solutions, Safehub, partnered with the University of California to protect their infrastructure from earthquake damage.
Unlike other parametric products that rely on estimates from public agencies, this sensor-based solution delivers improved accuracy in assessing earthquake impacts at the site. Consequently, the risk associated with payout assessments is reduced.
Parametric cyclone coverage by CelsiusPro and Tower
Tower and CelsiusPro launched the latest parametric insurance IT platform in September 2024 for Cyclone Response coverage. The product offers quick cash returns to policyholders when a tropical cyclone affects their claimed properties.
The system utilizes information from the Joint Typhoon Warning Center to raise payouts on the basis of predefined cyclone intensities. Its key features comprise an online premium calculator, self-registration, mobile payment options, and real-time monitoring.
To sum up, parametric insurance offers coverage to physical infrastructure against multiple natural calamities. The future of parametric insurance lies in the effective utilization of advanced technology embedded in AI, IoT, and data analytics to enhance resilience against emerging risks.
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