Covid-19 and its aftermath shed light on many inequities in our society, including health insurance. With unforeseen levels of uncertainty and volatility, the events of the pandemic showed how the structure of insurance policies was unable to adapt to the needs of the insured at a time when health coverage was most needed.
With traditional policies, a rigid set of terms dictates which health incidents are covered and the conditions that must be met to receive a payout, including but not limited to age, gender or pre-existing conditions.
Parametric insurance (PI), on the other hand, is a type of insurance that is emerging as the preferred approach to insurance coverage. PI is becoming increasingly popular because it breaks down policies into a series of parameters, and if that parameter is met, coverage is confirmed and payment is executed – instantly.
With the feasibility to meet a growing health priority, as well as the flexibility needed for our turbulent times, PI is showing that it can offer a more realistic approach to insurance in 2022 that works together with policyholders and the needs Theirs. Let’s see how this approach to insurance is helping to modernize the insurance industry as a whole.
The Times, They Are, A-Changin’
Although a major contributor, the pandemic is not the only event that has catalyzed the demand for change in insurance. There are also a host of other factors that are starting to become critical in nature – such as the increasing number of natural disasters.
From 1990 to 2019, a total of 9,924 natural disasters occurred worldwide. According to the Institute for Economics and Peace this is equal an increase of 915%. in such events during the same time period.
The biggest hurdle insurance companies need to address first are legacy systems so they can begin building a more viable coverage architecture. In the case of climate events, parametric insurance policies allow companies to pay insured individuals based on a particular event, not the damages suffered by it.
This is transforming insurance capabilities—not only opening up new ways to provide better coverage, but also changing the ways coverage can be applied.
Take the example of flood risk for populations living near a river. If an insurance company used parametric policies for natural disasters, it could install a river sensor in this case and the criteria for coverage would be very straightforward.
When the water level rises high enough to reach the sensor, the parameters are met. When the river crosses this level, an insured village would then receive the amount of money prescribed in the policy so that they could be relocated before the flood occurred – avoiding the natural disaster altogether.
By helping to deliver a new generation of policies, PI is showing that insurance can adapt with the times and not only better support policyholders, but go further in preventative measures. This will help the insurance industry to better position itself in the value chain and turn a new leaf for modern times.
Ensuring PI scalability
PI products are common across the banking and government spectrum, but have yet to become mainstream for individuals. The biggest challenge in implementing PI at scale for personal policies is a matter of functionality. As products become more sophisticated, they become even more challenging to manage.
An additional challenge with PI for larger entities is that it can affect regulations, distribution and risk assessment, making it difficult to build parameters in the first place. What is needed to truly scale PI is an infrastructure driven by the end product. For the insurance sector, this equates to the cover provided to policyholders at the end of the day.
Raincoat is an insurance company that has created a breakthrough approach to PI that enables the end product thanks to its scalable and automated climate insurance solution. Working directly with insurers to identify climate-related issues that policymakers face, they then take this data and build a fully packaged, end-to-end climate-related insurance product or protection scheme.
The company is able to absorb typical insurance challenges arising from software, regulation, capacity, science and data through its fully functional platform that automates the entire insurance lifecycle. With its highly experienced team of scientists, engineers and insurance experts, a team effort helps the company provide both individuals and larger entities with products that protect against the risk of natural disasters.
Announcing this week that it has raised a $4.5 million round, Raincoat’s full-stack approach appears to set the company apart in the growing PI space. Thanks to the company’s white label climate insurance products, a new generation of insurance will be within reach.
The Future of Health Insurance
End-to-end insurance policies will help companies start offering products and packages that cover an ecosystem of needs rather than a limited category. According to the McKinsey 2022 insurance report, this transition will help unlock $60 trillion in revenue for companies by 2030.00
Heralded as a potential solution to the inefficiencies seen through traditional insurance policies, PI protects a policyholder against the occurrence of a specific event when a set of parameters are met.
Adapting to modern coverage needs in 2022, parametric insurance will help rapidly transform insurance so that it can better prioritize and protect the well-being of society in an increasingly unpredictable world.
Disclosure: This article mentions a client of an Espacio portfolio company.
