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How To Define Parametric Insurance

Admin and Legal

Parametric insurance is where you are buying a defined amount of protection which will pay out when defined terms are met. It’s a very black and white form of insurance where a specific amount will be received for a specific event occurring.

In traditional insurance, you’re being covered for the cost of any damages. A loss assessor will evaluate the cost of the damage and your payout will be based on that specific damage. In parametric insurance, you are paid out when a specific event occurs, such as a flood, and the level of damage is irrelevant.

How does parametric insurance work?

One of the main benefits of parametric insurance is that the payout is given a lot more quickly than with other types of insurance. There is roughly a 3-stage process that happens and here we take a brief overview of them.

Selecting cover – You firstly choose what it is you want cover for. These are generally aspects that are specifically covered by other types of insurance. You then decide what value you place on that triggering event.

Agreement – You and the insurer will then come together to work out the specifics of what parameters need to be met. This could be a category of hurricane, a specific flood depth or any other type of measure. The point of this part of the cover is that it’s black and white and something that can be measured.

Settlement– When your agreed parameters have been met, the insurer will payout. As long as the measure is verifiable, you'll have no issues. This is all about connecting your risk level to data which is why it can be so popular.

What are the benefits of parametric insurance?

Quick payout– This is the benefit that we have touched on already. Take a flood, for example. If you have a property that has been flooded then you have to wait for the water to recede before you can even look at the damage. Once it has, then you need an assessor to come around and work out the value of all the damage to determine your payout.

This can all take a lot of time while you are in desperate need of repairs. With parametric insurance, as soon as that parameter is hit (let’s say flood depth) then the wheels will instantly be in motion to get your compensation. This can help to save you a lot of time.

More specific coverage – Parametric insurance is seen as a good step for both parties as you’re insuring against the risk of something happening with a specific sum rather than insuring yourself for the damage that has been caused.

It means that you can be much more likely to get an affordable premium where you may not have been able to before. If you’re unable to get specific cover for a risk then parametric insurance can be a great way of protecting yourself against the worst.

Transparency– With traditional forms of insurance it's going to be up to a loss adjuster to determine the value of your claim. This can involve giving property and its contents a value that a lot of the time will be subjective.

With parametric insurance, the payout is already going to be agreed so you don’t have to worry about getting the value of claims that you think you deserve. It reduces any stress as you have the security of knowing exactly what you’ll get.

Control – With traditional insurance it will often be stipulated what the money given can be used for. Because the payout you receive isn’t affected by the amount of damage, you will be given a lot more control over what you can spend your money.

This can be a welcome relief as often there are unforeseen costs involved that need to be covered. As mentioned before, parametric is black and white, and this allows you to feel confident and in control of the whole process.

Things to consider

Often with parametric insurance, the costs are going to be a lot smaller than with traditional insurance but so can the payouts. If the money that you receive isn't related to the damage and therefore if this is higher then you're not going to be covered. This is why you need to assess the value of assets to ensure you're covered.

With parametric insurance, the company doesn’t have to worry about lengthy claims processes, legal costs and loss adjustors. This reduction in cost for them can often be reflected in lower premiums. They also carry less risk of uncertainty and this can be better for you as well.

Should you get parametric insurance?

If you think there is a specific risk that your regular insurance is not going to be able to cover then it can be a great option. The lack of uncertainty is beneficial for both the company and consumers as both of you know exactly what will happen if the parameters are triggered.

Whether it's right or not for you is going to depend on your own needs and the risk factors involved. For many, it can be a great way to find cover there they may traditionally have struggled. You'll be paid out quickly and you'll have no uncertainty should the worst happen.

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FF Bequest Limited, trading as Bequest, is authorised and regulated by the Financial Conduct Authority with firm reference number 923791. You can check our authorisation on the FCA Financial Services Register by visiting the following website: register.fca.org.uk . We are registered in England and Wales, Registered office address: Founders Factory, Northcliffe House, London, United Kingdom, W8 5EH. Company Number 12367897.

Regulated by the Information Commissioner's Office (ICO) [ZA662891]. “Bequest" is trademark protected by FF Bequest Limited (UK00003452648). FF Bequest Limited is registered in England and Wales, No 12367897.