[Global Insurance Trends] – Parametric Insurance

One of the major bi-products of the worldwide pandemic is the rapid change in customer attitudes. This change extends across all spheres of consumer markets including the insurance market.

Customers are demanding a shift from traditional insurance products to policies which are aligned with technological enhancements and offer immediate claim resolution and cost-efficient insurance products. In response to the change in customer demand and market expectation, insurers have developed an attractive alternative to traditional insurance products with the introduction of a parametric insurance platform.

Parametric insurance

Parametric Insurance is not a new concept but proved to be one of the major global trends in insurance innovation in 2020. We take a closer look.

Simply put, Parametric Insurance covers the probability of a predefined event happening with the pre-agreed pay-out dependent on a scheme or index. Parametric Insurance is therefore not attached to the actual loss incurred, as is traditional insurance cover, but rather the happening of an event which falls within a certain index (or timeframe).

Parametric insurance versus traditional insurance

Parametric Insurance is commonly taken out for perils such as climate change, extreme weather, natural disasters and travel disruption. The key differences between parametric insurance and traditional insurance are set out in the table below:

  Traditional Insurance Parametric Insurance
Nature of the Risk covered Risk covered is linked to the loss associated with the happening of an event.

e.g. in the event of an earthquake the payout will = the loss of the damage sustained

Policy pays out a fixed amount on the happening of a pre-determined event.

e.g. in the event of an earthquake the payout will = the pre-determined amount applicable to the scale of the earthquake

Structure Standardized wording Customised product uniquely tailored to individual needs
Claims assessment Related to an assessment of the actual loss suffered on the happening of an insured event Automatically triggered on the happening of an insured event with the payout determined according to the pre-agreed parameter
Claims payments Can take weeks, months or even years Within days

Parametric insurance has been around for more than two decades and is firmly established in many countries. However, legal and regulatory uncertainty regarding its operation remains because some novel product formulations are not governed by statute and there has been little, if any, common law development in this area to inform how these policies operate, how they are classified for regulatory purposes and how they will be legally enforced.

The common law

Prevailing common law defines an insurance contract as one where, for consideration, an insurer promises to pay an insured if a specified event occurs which has an adverse effect on the interests of the insured. There is nothing in this definition to exclude parametric insurance from its operation. However, the common law requirement regarding insurable interest may not necessarily be fulfilled in a parametric policy.

Another legal impediment is the requirement that the insurance pay-out must correspond to the actual loss suffered and may not exceed that loss. Failure to establish these requirements will in many instances lead to parametric insurance products being treated as derivative investments and therefore will be regulated as such.

Current requirements for parametric insurance products currently operating in South Africa stipulate that the insured must prove that a loss was in fact suffered and that they have an insurable interest in the loss.


Deanne Wood and candidate attorney Emma Alimohammadi wrote this article