Parametrics a double edged sword

Parametric products have long been touted as a possible golden goose for the insurance industry, with some believing that the black and white nature of parametric products could radically simplify the claims process in the catastrophe space, but these products bring with them unforeseen risks. According to Hank Watkins, president of North America at Lloyd’s, the regulatory environment in the US is one of the big factors holding back the proliferation of parametric products. “One of the roles we played in California was to meet with the commissioner out there and convince him that parametric insurance is not gambling because a number of states just can’t get back that, and ultimately it’s a state by state conversation. But eventually, they realised that if they want people to purchase more quake insurance then they have to start somewhere,' he said, at Reactions North America Re/Insurance Conference. “I see it taking off, assuming you can get regulatory approval for whatever your trigger is,” he added. Ed Hochberg, chief executive of JLT Re North America, however, did not agree that parametric products were the right move for an industry that has often garnered a bad rap when it comes to customers being paid for their losses. “I’m really sceptical of products associated with consumers accepting basis risk. You could have an earthquake where the trigger is a 7.0 on the Richter scale, and it ends up being a 6.9. What is the perception of our industry in scenarios like that?” he asked. “I think we should be more focused, particularly on the consumer side, about how we make indemnity products simpler so we don’t find ourselves with that kind of basis risk,” Hochberg added. One California firm, Jumpstart, has already begun offering a coverage that will pay out based on the intensity of a quake in the area, even if there is no actual damage, with a process that the firm claims to require no paperwork nor a deductible.

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