Parametric insurance policies are not a common product type in New Zealand, though, several years ago, the Insurance Council of New Zealand commented that such policies could help offer an “efficient response” to natural disasters, and that they expected to see “more development” of the product.
Unlike traditional insurance policies, parametric insurance is designed to pay out immediately if the ‘parameters’ of the policy have been met. They are made to ‘fill the gaps’ that a traditional insurance policy doesn’t cover, and to help speed up the recovery of the policyholder while they wait for their general insurance claim to be assessed and paid.
The newest addition to New Zealand’s slim pool of parametric insurance products was launched recently, and offers cover to policyholders in the event of an earthquake. According to Bounce founder Paul Barton, New Zealand could benefit hugely from parametric products designed to cover natural disaster loss, with Bounce being modelled specifically on similar products from the United States.
Read more: What is parametric insurance?
“We all know that there is a very real risk around earthquakes in New Zealand,” Barton told Insurance Business.
“I did some research into parametric insurance products a few years ago and I really liked what I saw overseas, the kinds of products being offered, and the cover they provided. As I read about it more widely, I thought that this type of product was entirely applicable to New Zealand, and could really help Kiwis bounce back from an earthquake or a natural disaster more quickly.”
“There is a company called Jumpstart in California that also provides a parametric insurance product designed to cover earthquakes for its customers, and we thought there was definitely space in the market for something similar here,” he explained.
“What we then did is try to replicate that offering, and we’ve had lots of product innovation discussions with various people around the country who have all been very supportive of the concept.”
Bounce is backed by Lloyd’s of London, which Barton said has been looking to get “more innovative” in how it can address the risks customers are facing across the globe. He said that the efficiency of natural disaster response could be helped significantly by parametric products, as businesses and individuals would have immediate access to emergency cash following a destructive event.
“Lloyd’s of London in particular has been trying to be a lot more innovative and creative in responding to customer needs globally, and so they were really open to providing us with underwriting support,” he said.
“At the moment we offer different sum insured options for households and businesses, and there are different options available depending on your situation and needs. But we’ve only just launched the product, so we’re very interested to see what the market and our offering will look like in a year’s time.”
Discussing the benefits and potential disadvantages of parametric insurance, Willis Towers Watson director Simon Young noted that the swiftness of the payout is a huge advantage - however, everything also depends on the specific parameters of each policy, which could mean a customer losing out on a payout if the event did not strictly meet those parameters.
“Using the example of a windstorm, a parameter for parametric insurance might be wind speed,” Young explained.
“Let’s say the insurance product would trigger 100 miles per hour wind speed, or 180 knot kilometres per hour. It may give a certain payout at that wind speed, and then a higher payout rate at a higher wind speed.”
“We can then do the calculation very quickly by measuring the intensity of the hazard, and so you can make payouts very, very quickly,” he said.
“You can also price much more precisely, because your analytics have much less uncertainty around them. We find that to be very advantageous, especially in markets where there’s very little claims data or other kind of data, as you can reduce that uncertainty by pricing around the parametric markers.”
According to ICNZ, parametric products could have significant value in New Zealand, and it said the farming and agricultural sector may find them particularly useful given the “ups and downs” of climate that could substantially affect their operations.
However, it said the parametric market is still a “very small part” of the insurance sector, and it does not yet hold any data on parametric products.