How Technology Enhancements are Boosting Parametric

How Technology Enhancements are Boosting Parametric
Parametric Insurance

05 of 05

This insight is part 05 of 05 in this Collection.

December 6, 2023 21 mins

How Technology Enhancements are Boosting Parametric

1175250451

As data becomes more advanced and precise, so does parametric insurance as a risk solution — a win-win for both risk managers and insurers.

Key Takeaways
  1. Parametric insurance — triggered by a specific occurrence rather than actual loss — is seeing growth thanks to advancements in data and technology.
  2. AI, blockchain, IoT and other advancements will increasingly help insurers deliver more precise protection, pricing and efficient claims processing.
  3. Parametric complements traditional indemnity property coverage, as natural catastrophes continue to drive a hard property market.

While data and analytics are critical in nearly all aspects of risk management and risk transfer, they are especially vital to parametric insurance — and as technology improves, parametric is becoming a more viable and accurate solution for risk buyers.

Unlike traditional cover, parametric is triggered by predetermined third-party parameters — such as a windstorm category within a set geography — rather than an actual loss. The upside is faster payouts without the need for time-consuming assessments and a complementary solution that helps fill the protection gap.

In the face of rising natural catastrophe losses due to climate change, a continued hard property insurance market and growing protection gaps, more risk managers are seeing parametric as a complement to their property risk portfolio. This is particularly true when it comes to natural catastrophe exposures, and the ability to make uninsurable risks insurable.

Better Informed

Data Advancements as a Key Growth Driver

Carriers need to know the likelihood of a loss event to underwrite parametric insurance. They also need to know the precise location and severity of the event to issue claims payments. While past imprecise data caused obstacles, advancements in technology have transformed the parametric market.

“It's important that a parametric triggers when you feel loss pain, but it's equally important that it doesn't trigger when you don't feel pain,” says Peter Lacovara, a managing director in the Alternative Risk Solutions practice at Aon. “The greater precision we can use for structuring, the closer we can get to proxying exactly what you want to cover without paying for anything unwanted.”

With access to advanced data analytics and risk models, as well as a wealth of triggering data from weather stations, seismic sensors and financial markets, insurers are now in the perfect position to expand their parametric programs for risk managers.

Quote icon

Technology advancements are helping fill regional gaps across the globe. For example, if the nearest weather station is over a kilometer away, the difference between what is seen on the ground and what the weather station is reporting can be vast”

Kirstin McMullan
Principal Consultant, Natural Catastrophe, Australia

The most effective parametric policies are triggered by data that closely correlates with a policyholder’s loss. This relies on accurate and localized data that reflects how a loss impacts a customer in their location.

“What we're looking for is the most effective parametric policy that will correlate well with what the client is going to experience,” says Michael Gruetzmacher, head of alternative risk transfer and innovation in Aon’s Risk Capital practice in North America “That's really what we're trying to solve for in designing the solution, and that's how the technology and data can help improve that process.”

Climate-Related Perils and Resulting Data-Enhanced Solutions

Modern data allows for added precision when it comes to determining parametric insurance triggers. Remote sensing technology and satellite data, in particular, play a key role in the evolution of parametric offerings, especially around secondary perils like hail, tornado and wildfire.

“Expansion in the availability of data and the type of data collected allows for the selection of data that most closely mirrors the client’s experience and, more importantly, where the client suffers pain in a specific event,” says Colin Harper, managing director in Aon’s Alternative Risk Transfer and Innovation, Aon Risk Capital practice in North America.

tech_boost_2

Better Decisions

How Future Technology and Analytics Impact Parametric Insurance

There is a promising future for parametric insurance, which is projected to grow from $11.7 billion in 2021 to $29.3 billion by 2031, at a CAGR of 9.9 percent.2

To get there, advances in technology will be key:

  • Internet of Things (IoT): Sensors can provide real-time information on weather, seismic activity and other risks, allowing insurers to offer more accurate and timely coverage.
  • Data analytics and machine learning: Major parametric insurers use data analytics and proprietary data integration algorithms for machine learning risk models to keep costs lower and enable more accurate protection.3
  • Artificial intelligence (AI): Used to examine vast data sets and anticipate the likelihood of specific events, enhancing risk assessment and pricing accuracy.
  • Blockchain: Can automatically trigger payouts when a specific event occurs, reducing time and costs associated with claim processing and settlements.4

“I have a client with 18,000 locations — and gathering precise information for all of these locations can be quite difficult and complex,” says David Gierski, property broking director, Risk Capital, Europe, the Middle East and Africa. “Accuracy of data information is critical to ensure proper risk assessment, which is not possible without effective technology.”

As data and analytics continue to improve over time, parametric cover will become more efficient and economic as a complement to traditional property coverage — especially where capacity and pricing issues continue in traditional indemnity markets. This will enable businesses to manage risk more effectively, and ultimately achieve improved operational resilience.

Aon’s Thought Leaders
  • David Gierski
    Property Broking Director, Europe, Middle East, Africa
  • Michael Gruetzmacher
    Head, Alternative Risk Transfer and Innovation, North America
  • Colin Harper
    Managing Director for Alternative Risk Transfer and Innovation, North America
  • Peter Lacovara
    Managing Director, Alternative Risk Transfer and Innovation, North America
  • Kirstin McMullan
    Principal Consultant, Natural Catastrophe, Australia
  • Aurelien Schwachtgen
    Director, Client Solutions, Aon Global Risk Consulting, Europe, Middle East, Africa

1 Overview of Moody's RMS HWind
2 Parametric Insurance Market by Type (Natural Catastrophes Insurance, Specialty Insurance, Others), by Industry Vertical
3 The Future Looks Bright for Parametric Insurance
4 Parametric Insurance and Why Its Disrupting the Industry

General Disclaimer

The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Terms of Use

The contents herein may not be reproduced, reused, reprinted or redistributed without the expressed written consent of Aon, unless otherwise authorized by Aon. To use information contained herein, please write to our team.

Aon's Better Being Podcast

Our Better Being podcast series, hosted by Aon Chief Wellbeing Officer Rachel Fellowes, explores wellbeing strategies and resilience. This season we cover human sustainability, kindness in the workplace, how to measure wellbeing, managing grief and more.

Cyber Labs

Stay in the loop on today's most pressing cyber security matters.

Cyber Resilience

Our Cyber Resilience collection gives you access to Aon’s latest insights on the evolving landscape of cyber threats and risk mitigation measures. Reach out to our experts to discuss how to make the right decisions to strengthen your organization’s cyber resilience.

Employee Wellbeing

Our Employee Wellbeing collection gives you access to the latest insights from Aon's human capital team. You can also reach out to the team at any time for assistance with your employee wellbeing needs.

Environmental, Social and Governance Insights

Explore Aon's latest environmental social and governance (ESG) insights.

Q4 2023 Global Insurance Market Insights

Our Global Insurance Market Insights highlight insurance market trends across pricing, capacity, underwriting, limits, deductibles and coverages.

Regional Results

How do the top risks on business leaders’ minds differ by region and how can these risks be mitigated? Explore the regional results to learn more.

Human Capital Analytics

Our Human Capital Analytics collection gives you access to the latest insights from Aon's human capital team. Contact us to learn how Aon’s analytics capabilities helps organizations make better workforce decisions.

Insights for HR

Explore our hand-picked insights for human resources professionals.

Workforce

Our Workforce Collection provides access to the latest insights from Aon’s Human Capital team on topics ranging from health and benefits, retirement and talent practices. You can reach out to our team at any time to learn how we can help address emerging workforce challenges.

Mergers and Acquisitions

Our Mergers and Acquisitions (M&A) collection gives you access to the latest insights from Aon's thought leaders to help dealmakers make better decisions. Explore our latest insights and reach out to the team at any time for assistance with transaction challenges and opportunities.

Navigating Volatility

How do businesses navigate their way through new forms of volatility and make decisions that protect and grow their organizations?

Parametric Insurance

Our Parametric Insurance Collection provides ways your organization can benefit from this simple, straightforward and fast-paying risk transfer solution. Reach out to learn how we can help you make better decisions to manage your catastrophe exposures and near-term volatility.

Property Risk Management

Our Property Risk Management collection gives you access to the latest insights from Aon's thought leaders to help organizations make better decisions. Explore our latest insights to learn how your organization can benefit from property risk management.

Technology

Our Technology Collection provides access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities of technology. Reach out to the team to learn how we can help you use technology to make better decisions for the future.

Top 10 Global Risks

Trade, technology, weather and workforce stability are the central forces in today’s risk landscape.

Trade

Our Trade Collection gives you access to the latest insights from Aon's thought leaders on navigating the evolving risks and opportunities for international business. Reach out to our team to understand how to make better decisions around macro trends and why they matter to businesses.

Weather

With a changing climate, organizations in all sectors will need to protect their people and physical assets, reduce their carbon footprint, and invest in new solutions to thrive. Our Weather Collection provides you with critical insights to be prepared.

Workforce Resilience

Our Workforce Resilience collection gives you access to the latest insights from Aon's Human Capital team. You can reach out to the team at any time for questions about how we can assess gaps and help build a more resilience workforce.

More Like This

View All
View All
Subscribe CTA Banner