As the severity of the pandemic and the costs of the response continue to intensify, disrupted economic activity around the country has resulted in significant business interruption losses. Some of these losses might be absorbed by policyholders, most of them not, exposing the existence of an important protection gap for some pandemic-related commercial losses.

Parametric insurance policies may therefore soon become more attractive to a wide range of businesses, particularly if the cost of parametric insurance premiums falls as more insurers enter the market.

Parametric insurance, also known as index-based coverage is relatively new. Parametric insurance refers to coverage that is triggered by a parameter, that is, a metric or an index, that is easy to determine. Determining the parameter threshold happens when insurers are able to model it, with the trigger set so it aligns with an insured’s risk of tolerance.

Parametric insurance policies have historically been challenging to underwrite due to the difficulties inherent in accurately modelling financial risk during natural catasophes. It started gaining traction in the pre-Covid-19 world with may weather-related events including floods, droughts and cylones. Hazard modelling has since continued to improve, as weather stations and satellites capture more accurately weather-related parameters. Improved data and models have enabled parametric cover as an increasingly efficient, affordable and viable option in the market.

The Covid-19 pandemic has now brought further value of and the need for parametric insurance into sharp focus. It is expected to be a key method to build resilience against upcoming challenges in the Covid-19 landscape with more businesses turning to parametric products to safeguard assets that traditional insurers have not been able to cover.