My boss wants me to be sure I mention we offer parametric insurance for more than just hail. I think it is easier to visualize how parametric hail insurance works. So, I like to write about it.
How does parametric property insurance differ from traditional property insurance?
Easy: One is the correct way to insure weather risks and the other is based on 100+ years of tinkering with a fire policy to cover stuff other than fires. Guess which one is parametric?
When most people think of a hail policy they are actually thinking of a fire policy. A fire policy lists your property and insures your property against a list of perils that can damage your property. The policy originated as a simple fire policy and over time they called it an all risk policy. One of those all risk perils is hail. Every time one of those perils begins to cause a lot of losses, it gets restricted. Now they are trying to exclude pandemics.
The point is, it is difficult to price an all risk policy if you do not know the probability of each risk occurring. If you are going to insure the property against all risks, the easy solution is to overprice the unknown.
Hail is not an unknown.
We have 50 years of hail data. The data is collected by frequency, distribution, severity and size. Public records are kept by state, county and zip code. Detailed data is available down to street address.
Traditional insurance cannot properly price the hail exposure because they are not insuring hail. They are insuring your property.
A question for you: If you were going to insure 10,000 solar panels, or 300 new cars on a dealer lot, or an asphalt shingle roof, or a concrete roof against damage from hail, how would you price each one?
A second question: How do you project the future claim cost? Can the roof be repaired or does it need to be replaced. Traditional insurance cannot price properly because they cannot project the damage. They price hail insurance as if all losses are total.
Hail is very, very rarely a total loss.
Why pay for $1,000,000 of hail insurance on your building when the roof is only worth $100,000?
After you report damage from hail, the difficult and confrontational damage valuation process begins. The roof is beat up. You want a new roof. The insurance company wants to pay for 50 shingles. The ugly term “pre-existing condition” appears. Nobody is happy.
Insuring property against damage from hail is a very complicated mathematical problem. Considering traditional insurance companies do not want to do it any longer confirms their inability to do it correctly.
How is parametric different?
Parametric insurance does not base the price on the type of property to be covered. Parametric insurance is priced based on the historical and future probability of the event occurring.
Parametric insurance takes a completely different approach to insuring against damage from hail. All Parametric insurance policies base the claim payment on something that can be independently measured. If the agreed measurement is reached, the policy coverage and limits are triggered to be paid.
In the case of parametric hail insurance, the price of the coverage is based on the size of the hail that falls on the property. Hail does not care what it falls on. The price is based on the probability of various hail sizes falling at that location.
The insured selects the size hail that is likely to damage the property. If you have 300 new cars parked in the open in north Texas, you might want to insure against smaller hail than a commercial building owner in Oklahoma.
The important point is the insured decides how much they want to receive if the hail size event occurs. The difficult confrontational claims valuation process is eliminated.
With parametric insurance, it is as simple as:
Hail falls,
Hail is measured,
Make claim,
No claims adjustor,
Get paid.
Our next Blog will cover how the hail size (or wind speed) is determined during the event. Hint: no animals are injured in the process.