Initially born in France, Southeast Asia and Africa to support agriculture in the event of extreme weather phenomena and / or in the event of drought in developing countries, parametrics insurance could represent an alternative risk transfer solution (Alternative Risk Transfer), applied in many other sectors in order to overcome some limitations of the traditional insurance and reinsurance markets in combination with access to different forms of financing.
These solutions, which make it possible to transfer the impact of a negative event based solely on a parameter that can be objectively found and correlated to it, such as the variation of an index or the occurrence of a predefined event, have found among the first areas of penetration into the agriculture, transport and renewable energy sectors.
But the technological development to support the underwriting process and the calculation and verification of the index linked variables at the time of underwriting and in support of the settlement process, open up a range of alternative insurance solutions for both traditional risks and new risks whose insurance placement may not be practicable. .
ANRA talked about it together with Insurance Skills Jam - Il Convivio Assicurativo in a webinar moderated by ANRA Vice President and Senior Risk Consultant Strategica Group Paola Radaelli, attended by - among others - Jacopo Tanaglia, Chief Financial Officer Elba Assicurazioni S.p.A. and Claudio Perrella, R&P Legal Partner.
In her introduction, Paola Radaelli explained how some extremely important risks for companies are sometimes difficult or not at all transferable, and for these innovative solutions such as parametric policies could represent a solution. The possible application areas are those in which there is a reduction in production or revenues in the absence of material damage to the assets, as could happen for example in the case of a hydroelectric plant following a prolonged absence of rainfall. In similar cases, the parameters could represent a solution, provided that two aspects are managed: the identification of an objectively determined trigger event indicator, previously accepted by the insurer and insured, which has a high positive correlation with the event to be transferred, and a simple method of settling the damage, not excessively burdensome and, if possible, can be determined in advance.
As told by Jacopo Tanaglia, Revo has launched a new initiative in the non-life insurance sector, focusing the commercial proposal on specific market segments represented by the world of specialty risks offered to both retail and SME customers (the latter area which may apply in Italy about 1.3 billion euros). While the market data relating to the parametric segment is not yet significant, it is likely that it could represent a real innovation for the sector and, together with digital products, one of the segments with the highest growth potential over the next few years. With this in mind, Revo believes that data management and proprietary technology are a critical success factor.
Parametric policies are a tool that offers opportunities in relation to some particular types of coverage, for which a rigorous assessment of the damage is always rather difficult and expensive, and it may therefore be more convenient to provide automatic compensation mechanisms upon the occurrence of a certain event. (trigger). The lawyer Perrella explained this, adding that in some jurisdictions, such as France, Spain or the United States, the use of parametric policies is already relatively widespread, especially in relation to damage caused by atmospheric events, but this type of policy offers potential also with regard to cyber risks, or for business interruption insurance coverage, especially where there are no physical claims.
However, there are some potentially critical elements that must be carefully considered and that deserve further study. In the first place, a mechanism that allows the insured to receive compensation that is independent of the concrete assessment of the damage suffered may be in contrast with the indemnity principle, by virtue of which the insured can only obtain compensation for the damage suffered. Among other things, this is a principle generally considered to be of public order and therefore inviolable. However, there are some exceptions to the indemnity principle, for example the so-called estimated policy in the context of hull coverage in maritime insurance, where a value to the boat is estimated which in the event of total loss represents the indemnity recognized to the insured, with the insurer's prior waiver of contesting the accuracy and fairness of the estimate. Probably a more significant criticality can arise in the reverse case, i.e. when an event does not reach the trigger threshold and is nevertheless very damaging: according to the principle of parametric policies, in these cases the insured would not receive any type of protection from the policy that has subscribed.
