Why Is Parametric Credit Insurance On The Rise?
Unlike other insurance policies, parametric insurance is an insurance type which is based on a predetermined set of parameters, or conditions, as opposed to the actual value of the asset or loss. Parametric insurance offers business owners and insurers a responsive, cost-effective and efficient insurance alternative to both transfer and manage risk.
Traditional insurance policies offer protection against specific losses, however, in recent years, parametric credit insurance has become a more regular choice. Often referred to as index-based insurance, parametric credit insurance offers predetermined payouts which are based on set events which are triggered. This can be seen by some businesses as being more secure for their business. So, with that in mind, let’s take a look at why parametric credit insurance uptake is on the rise.
How Does Parametric Insurance Compare?
Parametric, although it does sound complex, is a relatively straightforward insurance offering. Many people will understand the uses of commercial property insurance or credit insurance, for example, and this is where a premium is paid in return for a promise of a full return of the loss that has been incurred.
Payment will be made, usually only after a thorough assessment of the loss has been investigated, with the idea of putting the insured business back in the position which they were in before the incident or event. In comparison, parametric insurance covers the probability of predefined events happeninng, rather than the actual cost which was incurred.
What Do Parametric Insurance Solutions Involve?
A Triggering Event
Parametric insurance cover will usually be triggered should a pre-defined event be met, or exceeded. It may also be something that is measured by an objective parameter which was set in place, or an index which is related to the exposure of the insured.
This triggering event could be a natural event, such as a flood, earthquake or storm where the parameter that needs to be met is a magnitude, speed or amount of rain fallen. Natural triggers are the most common when it comes to parametric insurance, but there are other factors which could be included such as power outage or market fluctuations.
Pay Out
Is the parameter is reached or exceeded, then a pre-agreed payout will be given with parametric credit insurance, no matter if any physical or actual loss is sustained. The threshold will typically be set in a way which aligns with the businesses risk tolerance and plan.
What Is A Parameter?
A suitable parameter or index measurement is an objective measure which can be directly correlated to a specific risk and, ultimately, would lead to a financial loss for the uninsured party. This is considered a measurable index which is related to a scenario, for example, when rainfall delays the completion of a construction project. One thing which is important with parametric insurance is that neither the insured or the risk taker have the capability to influence the event or the severity of such.
What’s The Difference?
Parametric insurance policies are not designed to replaced other, tradtional, forms of business insurance, but to compliment them instead. It can be used to fill any gaps left by indemnity insurance and can be used to create a stronger, more strategic, approach to business insurance. Credit insurance brokers can work with you to create a comprehensive insurance policy, protecting all aspects of your business.