Insurance in 2020 is a tough gig. Even before COVID-19 flipped the year on its head the market was hardening. Commercial insurance premiums rose for the tenth consecutive time in Q1 according to the global Marsh Market Index.
A hardening market provides a tough background in which to set up a new MGA. But that’s exactly what FloodFlash co-founders Adam Rimmer and Ian Bartholomew did in 2017.
This isn’t a story of failed enterprise though. In fact, for FloodFlash things have never been better. Their speedy claims from Storm Ciara in February are scooping up countless awards. Their growing network of150 UK brokerages has set GWP records in each of the last three months – signalling strong recovery from the disruption caused by COVID-19.
Despite the hardening market, COVID-19 and the ongoing business interruption scandal this commercial MGA is thriving. Why? Because it is the market lead in the hot insurance trend of this century – parametric insurance.
The parametric ascendancy
Parametric cover sounds complicated,but the principle behind it is simple. Whilst traditional insurance pays based on damage caused by an event, parametric policies pay based on the event itself. Each policy is based on measurement of a value (or parameter, hence parametric). FloodFlash measure flood depth but the principle works just as well for other causes of loss.
Parametric cover is well positioned to capitalise on tough market conditions because of simple cover design. Traditional flood insurance comes with a lot of uncertainty. 40cm floods cause damage to two different properties in different ways. The building, stock, equipment, or flood protection all impact flood costs. Sometimes the same property will have a vastly different claim one week to the next (e.g. a garage where cars move in and out on a daily basis).
The uncertainty around the valueof each claim leads to increased premiums, excesses or even exclusions on standard policies. In a hardening market the uncertain risks often lose confidence quickest. Flood is one of the first perils on the chopping block when insurer belts tighten.
Parametric insurance is different. Claim valuesare either set by the insurer or (as it is in the case of FloodFlash) chosen by the client. When you know the value of claims ahead of time, underwriting carries less uncertainty.As a result, parametric providers can write more confidently, often covering risks that traditional insurers turn down.
Parametric cover is better for insurers in many situations – but what about the demand side of the equation? To understand why the take-up of parametric cover is accelerating we need to look at what the client gets out of the deal. Whilst parametric policies are often easier to implement and more flexible than traditional insurance the big difference is speed.
When parametric insurance removes damage from the underwriting equation it also removes loss adjustment from the claims process. The result is clearer communication and claims that take hours to resolve rather than months.
A drawn-out flood claim might offer pound-for-pound compensation, but when it takes too long the moneygoes to the liquidators. What good is protecting the balance sheet if your cash flow means you can’t pay wages or a looming tax bill? Many businesses have been closed for months during lockdown. Another loss-compounding COVID closure would spell catastrophe. Insurers that measureclaim times in hours rather than months give client businesses a much better chance of surviving – the main function of any commercial product.
Parametric cover is better suited to secure short-term survival for businesses that suffer a loss. The upshot is that many of those businesses are turning to parametric cover to make sure they can ride out catastrophe in the short term.
The future of BI?
The next challenge is whether it will fill the vacuum left by business interruption exclusions. Many insurers are trying. The parametric BI gold rush will be won by two factors. The measurement chosen and how effectively they can communicate this new form of cover.
Firstly, how to establish the most effective measurement. There are many data points to choose from, including footfall, stock value or sales volume related. Whatever the answer, the most important thing is to find triggers that remove as much basis risk (i.e., the difference between payout and loss) as possible. Clients have more confidence in a parametric product when the measurement correlates tightly with a loss.
For the education point we can turn to experience from FloodFlash. For them, it’s about breaking down reservations in simple terms.Clients that are uncomfortable choosing cover amounts should be reminded that they’ve been choosing life insurance payouts for years. Risk-averse brokers should heed endorsements of parametric from the FCA, Lloyd’s and BIBA(or risk losing out to their more forward-thinking competitors). Reluctant insurers need to embrace the cutting edge of insurance innovation that will form a large chunk of GWP in years to come.
As the global market emerges from the challenges of 2020the principles of parametric cover will form a bedrock for manyinnovative insurance products. Parametric coveris already closing the protection gap – soon it will drive new revenue opportunities across the whole supply chain.