Parametric products part of the future: Mumenthaler

Parametric insurance products will play a crucial role in helping businesses deal with natural catastrophe risk, according to Jan Mumenthaler, Principal Insurance Officer at International Finance Corporation.

Natural catastrophe exposure should be front of mind for c-suites, risk managers, and insurance companies right now, Mumenthaler says, and parties should think about how parametric insurance can help.

Parametric insurance, which utilises data analytics, is one of the newest tools available to companies in high-risk weather zones. The product does not indemnify full loss but instead pays out a set amount when a catastrophic event reaches a certain threshold, such as a certain amount of rainfall or an earthquake of a particular magnitude.

The insurance is viewed as a more affordable option for buyers looking for natcat protection. Rather than covering replacement to damaged assets using loss adjusters, it delivers funds quickly to the insured following an event.

Mumenthaler believes the new technology is part of the “future of insurance”, and can help companies and insurers handle risk more effectively. Insurance Services Group Asia already has parametric products across its natcat range.

Mumenthaler said: “For me, the most fundamental difference is we’re away from this principle of indemnity. So we’re not seeking coverage for replacement of damage assets anymore, but providing instead of that, liquidity which is not directly linked to the damage anymore, but to the occurrence of an event.”

He believes it can remove some of the frustration suffered by claimants. “It is a whole lot faster compared to the old style approach where you have to find a surveyor that has time to go out to visit the site, and gives a lengthy assessment of the actual financial damage.”

While the new technology offers a solution for risk managers, Mumenthaler believes the adoption of parametric insurance needs to be assessed in detail. Relying on a set threshold for payment on a claim could leave companies open to risk, he said.

“There could actually be an event which has a significant impact on a company and its operations, but it wouldn’t necessarily trigger the coverage because the event did not have the necessary magnitude of force. So that creates a certain fear that there is no coverage for an event that’s happened. On the other side, there may be a payout when there really has not been any impact to the operation,” he added.

He said risk managers need to “get their head around” Parametric products before switching away from conventional insurance. “I think it requires a whole lot more preparedness to structure the transaction correctly, but also to be prepared in the aftermath,” he added.