User:Sacohen11/Parametric Insurance

= Parametric Insurance = Parametric insurance (also called index-based insurance) is a non-traditional insurance product that offers pre-specified payouts based upon a trigger event. Trigger events depend on the nature of the parametric policy and can include environmental triggers such as wind speed and rainfall measurements, business-related triggers such as foot traffic, and more. Examples of current parametric products include the Caribbean Catastrophe Risk Insurance Facility (CCRIF), the African Risk Capacity (ARC), the protection of coral reefs in the state of Quintana Roo in Mexico.

Parametric insurance policies have most frequently been implemented in developing economies, oftentimes for agriculture insurance. In the US, there are proposals to implement parametric policies more often, specifically in the case of flood insurance through the National Flood Insurance Program.

Comparison to traditional indemnity insurance
Traditional indemnity insurance is structured so that after an event that leads to a loss, such as a fire, flood, storm, or car accident, the insurer reimburses the insuree for the total value of the loss, given no limits and deductibles are included in the insurance policy. To quantify loss, a representative from the insurance company accesses the damage. In a parametric insurance policy, insurance companies need to verify that the loss event exceeded the trigger event(s) specified in the policy. For weather-based parameters, this involves researching measurements from trusted third-party weather services or collecting sensor and satellite data to verify the magnitude of the weather event. Once the magnitude of the trigger is verified and "proof-of-loss" is obtained, the insurer disseminates the payout specified in the policy for the corresponding trigger event(s) to the insuree.

The main benefit of parametric insurance policies at that they offer faster payouts than traditional insurance based on the nature of the trigger event. Because it is quick to verify if the trigger event passed the threshold specified in the policy, parametric policies can payout quickly. These quick payouts are especially beneficial for the liquidity to successfully recover after a disaster strikes. In addition, since parametric insurance policies can be customizable, insurers can provide policies for events in which not much data exists on a local level or which have low probabilities of a high-impact event.

The main drawback of parametric insurance policies are that they often do not cover the full basis risk of the insured. Policies are based on parameters and therefore may not be written to cover the full damage that occurs.

Coral Reefs in Quintana Roo, Mexico
Part of the Mesoamerican Reef (MAR) is located off the coast of the state of Quintana Roo in Mexico, where Cancún is located. The reef has experienced degradation from pollution, storm damage, rising ocean temperatures, and increasing tourist activities. Recent analysis indicated that the reef prevents $42 million in damage to buildings and $20.8 million in damage to hotels annually. In response, Quintana Roo created the Coastal Management Trust Fund to purchase a parametric insurance policy for protecting and restoring the reef. The parametric policy has an annual maximum payout of $3.8 million and is triggered by wind speed. The payout changes based on the wind speed in the manner below:


 * 100-129 knots --> 40% of maximum parametric payout
 * 130-159 knots --> 80% of maximum parametric payout
 * > 160 knots --> 100% of maximum parametric payout

Partners of the Quintana Roo government include the Nature Conservancy, the Cancún and Puerto Morelos Hotel Owners’ Association, CONANP, Mexican Universities and insurance industry representatives.

Caribbean Catastrophe Risk Insurance Facility (CCRIF)
CCRIF is an insurance company established in 2007 that allows Caribbean and Central American Countries to purchase parametric insurance products for weather catastrophes. By pooling their risks together, each participating country is able to purchase insurance for significantly less than if they had gone through the private market.