Happy Holidays from 'Connected'  December 21st 2023

Incorporating Parametric Insurance Into Your Business

By understanding parametric insurance you can be better prepared to integrate it into your company's risk management plan.The frequency and severity of weather catastrophes are on the rise. From devastating hurricanes to prolonged droughts, I see these events exposing a glaring global coverage gap in insurance.

Aon estimated economic losses due to natural disasters/weather catastrophes to be $313 billion globally last year. According to them, only 42% of those damages were covered by insurance programs. The overwhelming majority of insured losses were recorded in the U.S., with many communities worldwide having few realistic options to build financial climate resilience.

The evolving landscape of climate-related risks presents unique challenges for businesses worldwide. In this context, as someone who works in the industry, I've seen how parametric insurance can act as a strategic tool in managing weather-related risks.

However, effectively incorporating parametric insurance into a business's risk management strategy requires understanding its nuances, potential hurdles and industry-specific applications.

How Parametric Insurance Works

I believe that parametric insurance offers a fresh perspective on weather-related risk management by attempting to address the limitations of traditional indemnity-based insurance. Unlike the traditional insurance model, where claims are often subjected to lengthy assessments and negotiations, parametric insurance streamlines the claims process by linking payouts directly to objective triggers. These triggers, such as wind speeds or rainfall levels, are predefined and easily verifiable, eliminating the need for lengthy claims investigations.

Osho Jha, Arbol's Co-Founder and Chief Data Scientist, leads data-driven parametric products. Co-Founder at dClimate

How Moen seeks to plug the leaks costing insurers

Desmond Devoy, of Insurance Business Canada, sat down with Jeff Barnes, vice president, business development, to discuss the Moen Smart Water Network, Flo Smart Water Monitor and Shutoff, ESG, the impact of water leaks on the insurance market, and tips for stopping leaks before they become a problem.

Since there have been pipes to carry water, there have been leaks.

And ever since insurance policies began to cover water damage, pipes and policies have been in each other’s lives.

But in a conversation with Jeff Barnes (pictured), vice president, business development, Moen Smart Water, we discover more about Moen’s smart water security products and how the company seeks to save insurance companies money, save water, and prevent damage to policyholders’ homes.

Q – What role do smart water products, particularly the smart water security products, play in your ESG (Environmental, Social and Corporate Governance) story?

A – Within the broad umbrella of “ESG”, we focus on activities that are most meaningful to our business, and where we can have a real impact, and our Moen Smart Water Network – an integrated system of products working to monitor and enhance users’ experiences with water in the home while facilitating water conservation – is one of those areas.

Leaks may be relatively small, but they add up to a lot of wasted water. Even one slow leak can amount to over 11,000 litres of water wasted in a year. A burst pipe when no one is home can easily waste over 37,000 litres of water in just a few hours.

The Biggest Opportunity for Innovation

In this Future of Risk Forecast, Nick Lamparelli says firms have mostly digitized -- but still can't find the information they need when they need it.

Insurance Thought Leadership:

What technology now in the market do you believe will have the biggest transformative impact on insurance and risk management in the next five years?

Nick Lamparelli:

I believe IoT and sensor technology is getting traction, and insurance has finally noticed. Sensors can do much around notifying when events are occurring or about to occur. These technologies will have the capability to reduce both frequency and severity of claims (significantly). These technologies make the insurer highly relevant day to day to the policyholder. Because of this, insurers can get more innovative around coverage design and user experience. Insurers that invest in embedding IoT stand to be seen through a different lens every time a notification on someone's smart phone tells them that "no water was detected" so they can truly feel at ease and get the sense that their insurance premium is actually doing something for them.

Insurance Thought Leadership:

What do you see as the biggest obstacles to insurance innovation, and how would you recommend overcoming them?

Nick Lamparelli:

The biggest obstacle is inertia. And inertia is a byproduct of culture. Many insurance organizations do not have the corporate governance that forces them to enact change (see the mutuals and farm bureaus). For many of these firms, only the cold hard reality of financial existentialism will force someone, anyone to make the changes that need to be implemented.

Insurance Thought Leadership:

What is an area that you believe remains untapped/unfulfilled/overlooked for the promise of innovation in insurance?

Nick Lamparelli:

Knowledge management. We spend way too much time looking for things: searching for files, attachments, emails, etc. Insurers have done a decent job digitizing, but it hasn't helped them because now they have a mountain of data and no ability to mine it. Knowledge management, including using AI technologies to make sense of that data, will be crucial and unveil a ton of insights into a company's own data sets.

Insurance Thought Leadership:

How do you believe AI will transform insurance and risk management?

Nick Lamparelli:

Aside from where it is used now (to detect fraud, mostly), I think AI in knowledge management will be the first big value-producing outcome of generative AI. (See my prior answer.)