The insurance industry is struggling in covering the growing losses due to extreme weather events cause. The cost of policies is becoming excessively high thus worsening the protection gap. A Parametric insurance might come as a solution in this time. And many people in US have already started opting for this. It is a relatively new form of property-casualty insurance being sold to homeowners.
According to the insurance specialist, KJ Vanderwerken, Parametric insurance covers the probability of some event happening that is likely to cause an economic loss. But they are not like the traditional casualty insurance that reimburses a policyholder for the cost of damage incurred to property.
A Parametric insurance requires a pre-defined event to occur for a consumer to receive a payout. The event won’t lead to a pay out but its extremities will, like a payout won’t be given in case of storm but when the storm reaches its threshold or a certain intensity level. Or if a homeowner purchases a parametric insurance policy to cover earthquake damage, the insurer sets a final point of where on the Richter scale an earthquake must fall for the owner to receive a payout.
The parametric insurance is less towards a traditional property insurance and more like a life insurance. For example, if a family’s home doesn’t sustain damage in a Category 3 hurricane, but they had a parametric policy that triggered a payout when a Category 3 hits, they may receive a windfall. But they will go without payout if the hurricane was not category 3 and yet the home was damaged.
Experts share that certain policies are based on an honors system while others automatically issue a payout. Parametric insurance’s events include everything from hurricanes, floods to droughts and earthquakes. The policies are designed according to the climate change.