THINK SIMPLE THINK DIFFERENT

A product revolution could be brewing in the insurance sector:

Insurance has always been a tough product to manufacture (underwrite) and a tough product to sell. But there is a glimmer of change on the horizon, in the form of parametric insurance. How is it different? Fundamentally, it is a contract that ensures a policyholder against a specific event, and if the event happens a set amount is paid based on the magnitude of the event. This is unlike traditional insurance which pays against the magnitude of actual loss. The amount payable, the parameter, and a third party responsible for verifying that the parameter was triggered – all these are in the parametric policy. The third-party will usually be a government agency. For the insured, payments are quicker - usually made in a matter of days or weeks after the specified event occurs, as against months or years in the case of traditional insurance policy.

Parametric insurance solutions have been available since the late 1990s, but have become popular in corporate insurance recently. Newer products are being developed around the world and are often described as ‘elegant solution for risk-transfer concerns’. Parametric insurance is being introduced in Africa and south-east Asia, where extreme weather is a common problem. Sri Lanka has a unique parametric product - offered jointly by charity Oxfam and insurance company Sanasa Insurance - for possible losses due to natural disasters in cultivations of rice, pepper, and cinnamon, which are the country’s major items of agricultural exports. The product has inherent processes based on distributed ledger technology to cover risks and uses weather stations to automatically trigger claims.