Parametric insurance solutions have been used for well in excess of 20 years in the reinsurance sector, predominantly covering catastrophe risks; but in recent years they’ve been used effectively at the consumer level, including in the travel insurance space. Flight cancellation or delay is one of the key areas in which parametric solutions have been revolutionising the consumer experience of insurance and bringing myriad benefits to insurers. But there are other examples, too, and there will soon be many more.
All this has been made possible through the travel insurance industry reaching a critical point at which it has the data necessary to provide this type of cover and the technological means at its disposal to bring it to fruition. As parametric models provide immediate, data-triggered payments to insureds once a specific event has occurred, it’s only through many years of gathering claim and risk-related data that insurers are able to create such offerings.
Startups in the insurtech space have had a big part to play in kick-starting the travel insurance industry’s journey into parametric cover, and now incumbent insurers are increasingly working with such tech providers to offer customers the instant compensation options they are looking for. At the same time, by providing financial protection against losses that are not covered within the traditional travel insurance structure, insurers offering parametric models are closing the protection gap and building new revenue streams that are tailored very specifically to today’s travellers.
I don’t think you need me to point out how happy an insured would feel if their flight got delayed and their insurer managed to relay this information to them even before the airline, while also offering them cash compensation on the spot or lounge access while they wait for the next flight. This is what parametric insurance does. And it’s proving so popular, more and more insurers are getting onboard with it.
Parametric insurance models remove the need for the customer to file a claim, find and send accompanying paperwork and proof, and wait it out until their insurer contacts them with their decision on whether they are indeed covered and how much they are willing to pay out. Instead, parametric insurance creates a different type of opportunity for insurers to improve the customer experience, building trust and loyalty.
“Research consistently shows that human brains do not process uncertainty rationally,” said Kate Stillwell, Founder & CEO of Jumpstart, a US-based company offering parametric cover for earthquakes, in an article for PropertyCasualty360. “The greater the uncertainty, the more distrustful and adversarial customers behave. Parametric alleviates distrust by building in certainty to the outcome.” As the trigger data is available to both the insurer and the policyholder, it ‘reduces the perception of unfairness’, she says.
Such transparency and preset criterion are vital to the success of such models. “Parametric insurance offers speed and certainty, as it is based on data, parameters, and pre-defined triggering events,” said Mark Seddon, CEO at Pact, a UK-based insurtech firm. “The key is the lack of moral ambiguity. Neither those who determine the triggers, nor those claiming, can manipulate the triggers.”
In an age where speed is currency, the convenience of parametric models is another bonus for consumers. The combination of data, mobile technology and artificial intelligence allows insurers to provide a product that is simple to use and hassle-free, meaning the whole process doesn’t get in the way of users’ busy lives, says Paul Prendergast, former CEO of Ireland-based insurtech company Blink Parametric, part of CPP Group.
At the same time, the personalisation afforded by the very specific cover parameters and the in-your-pocket nature of parametric cover appeals to today’s insurance buyer. “We are all consumers and when we use a service that provides speed, convenience and intuitive solutions to meet our needs, it leaves a lasting impression,” said Prendergast.
Parametric insurance offers speed and certainty, as it is based on data, parameters, and pre-defined triggering events
One of the major benefits of happy customers is, of course, customer retention, and this is something that all insurers strive for. Insurers also benefit from the elimination of uncertainty that the parametric model provides – knowing upfront the potential cost of payouts, insurers can better predict their losses and set rates accordingly.
“Parametric models’ use of objectively measurable events can facilitate measurement and foretelling of possible losses and claims,” Seddon said. “For example, wind speed parameters in a defined geographic location being triggered and verified by trusted and objective weather data providers may enable insurers to predict surges in delay or cancellation claims, affording them opportunity to pre-empt inquiries and prepare responses.”
Dealing with surges following trigger events is certainly helped by the automated nature of this type of insurance. “The parametric model is designed to operate at scale, handling immediate and significant volume increases on claims in response to last-minute travel disruptions,” explained Prendergast. “It also alleviates pressure on claims assessors and customer services teams facing capacity issues during claims surges.”
In addition to controlling loss ratio and exposure, Noam Shapira, Co-founder of Setoo – an Israel-based company offering embedded insurance and parametric insurance – also points out that parametric insurance provides great unit economy through its automation framework. The model allows the rollout of products for the long-tail, ‘which means the ability to provide products even at low cost, and a variety of products to different consumers with different needs’, he said.
Personalisation is the name of the game in today’s insurance industry, and this type of insurance gives customers what they need, when they need it. The ‘ability to cover traditionally difficult-to-model potential losses’, says Seddon, is a major benefit of parametric insurance.
Not only does it provide additional income streams, however; it also saves insurers money on processing costs, while keeping claims cycles short and efficient. “The insurer doesn’t need to spend resources and money on assessing claims – the data does all the hard work for everyone,” stated Prendergast.
Immediate payments also mean the ‘claim’ is ‘closed’ without any further action or conversations needing to take place. As such, the model prevents follow-on losses as are common in the traditional insurance model.
Fits like a glove
The travel insurance arena provides the perfect ground for parametric cover – it is data-rich and there are numerous niches that suit the parametric model well that are missing from traditional insurance areas of coverage. It also ‘has the capacity to resolve problems in real-time, when the insured traveller needs a helping hand’, says Prendergast: “That’s transformative in insurance terms both for the industry and for the policyholder.”
In an age where speed is currency, the convenience of parametric models is another bonus for consumers
Blink’s parametric travel insurance solution offers flight delay and cancellation compensation, and it’s all made possible through the ‘wealth of flight data available that insurance companies already use and is universally trusted’. “The data provides the ability to map options and solutions along a typical yes/no parametric model so that each problem scenario triggers an action to assist the customer. It’s simple, effective and powerful,” Prendergast told ITIJ.
The company also offers a similar solution for delayed and lost luggage when travelling, and sees great potential for the travel sector in offering parametric cover models for winter sports holidays when travellers are faced with snow-free slopes when they arrive at their destination. “Records of weather data for the specific location on the specific dates can at least soften the blow by issuing a pay-out in real-time,” said Prendergast.
Unique product offerings are the lifeblood of parametric models, which has a lot to do with their relevancy for the type of trip being taken. Setoo, which already offers immediate payouts for European campers who would like to cancel their trip if the weather forecast over their holiday dates is for rain, also suggests that wind-guarantee for surf trips and cruise cover in case of poor sea conditions are good examples of where parametric cover is particularly well suited to the travel sector. I’m sure there would be plenty of people willing to take out the latter insurance once the cruise sector is back to full steam ahead!
The pandemic shift
The impact of the global Covid-19 pandemic, although devastating for travel insurers, has led to a shift in consumer thinking that insurers are poised to navigate. Customers are looking for more reliable insurance products and parametric cover has that asset in spades.
“I believe that now, as we begin to travel again and recover from the devastation that Covid-19 has wreaked on the travel industry worldwide, there is an energy and appetite for innovation as insurers are forging ahead to rebuild trust, positive consumer sentiment and confidence in their services,” said Prendergast. “The benefits of parametric for insurers are extensive as we face into the likelihood of an unpredictable travel environment at least for the short to mid-term.”
Parametric solutions, with the ‘claims reinvention’ that they bring, are set to increasingly change customer experiences and significantly reduce business costs, agrees Seddon: “Parametric solutions offer insurers a streamlined process to make the current market more viable, increasing profit margins on policies and lowering the required headcount, ultimately offering a way to survive and thrive despite the prediction of low travel volumes over the next 24 to 36 months, due to Covid-19.”
The future is bright
It’s exciting to see new and innovate travel insurance products emerging, via traditional as well as non-traditional insurance providers. The plethora of data from machine learning and artificial intelligence has ramped up the types of risk that can be covered by parametric insurance and the travel sector is rife for this model. At the same time, blockchain technology and real-time data capture of risk-related information – such as flights, political unrest, weather, and disease outbreaks – has created a situation where there are many more niche cover areas that are poised to be dominated by innovative new parametric products in the near future.
The operational efficiencies of such models are without doubt a lure for insurers, while customers are benefitting from an industry shift towards ‘removing the complexity from insurance products, making them simple, accessible, user friendly and automated with streamlined claims validation’, says Prendergast. “We are hearing this in consistent messaging from industry leaders and have seen how insurers are also evolving through outsourcing innovation projects to insurtech experts, thereby accelerating the implementation process and driving the pace of change, which is very exciting.,” he told ITIJ. “We must also recognise that the global leaders in travel insurance such as Allianz, Manulife, Blue Cross, Terrawind Global Protection and TuGo are blazing a trail in utilising parametric solutions as part of their digital transformation, and the industry is watching and reacting positively.”
It really feels like now is the time to harness the power of parametric and seize this opportunity to reimagine the travel insurance industry for today’s traveller. What has already begun looks set to pick up pace as insurers are better equipped than ever to meet shifting consumer needs.
As Prendergast believes: “The scope and adaptability of the cover to enhance traditional travel insurance coverage and inspire the creation of innovative new cover opportunities makes progress a certainty for the parametric model.” The future is bright. The future is parametric.