Original text here from Patrice Bernard (LinkedIn)
Discreetly, parametric insurance is gaining ground in increasingly strategic areas. It started with simple coverage for flight delays, evolved to weather-related events, and has now reached a new milestone: a policy offered by Aon to protect against coastal flooding caused by hurricanes.
The principle, now well-established, remains simple, even if its execution is somewhat more complex in this case. When signing the contract, the client determines the compensation amount they wish to receive (based on potential damages) and the water level threshold that will trigger the payout. These two factors, along with the geographic location of the insured property (which defines its exposure to risk), help determine the premium.
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From that moment on, the insurer’s technology partner, Floodbase—along with Swiss Re as a key contributor—deploys an AI-powered monitoring system. In the event of a major incident, this system continuously estimates the average height of the flood waves in the area surrounding the insured asset. As soon as the threshold set in the policy is exceeded, the agreed compensation is automatically paid to the beneficiary.
Aon presents its solution as a response to the challenges the insurance industry faces due to climate change. While the ability to offer coverage to individuals and businesses in high-risk regions—where traditional insurers are withdrawing—has clear value, and while the company benefits from limiting its financial exposure (since it no longer compensates actual damages), the cost may remain a significant barrier for customers.
Compared to the relatively simple parametric insurance products developed so far, applying this approach to more complex scenarios adds significant value. It eliminates the need for damage assessment and claims evaluation, which not only reduces administrative costs but also proves crucial in natural disaster scenarios where the volume of claims can quickly become unmanageable.
While not a cure-all, parametric insurance may no longer be just an option for improving customer experience through transparency and instant payouts. Instead, it could emerge as a full-fledged protection model, offering an alternative when traditional insurance contracts can no longer fulfill their role. Given the accelerating risks and impacts of climate change, such an option is increasingly indispensable.
