What Is Parametric Insurance?

What is parametric insurance?

Parametric describes a type of insurance that works differently than the conventional “indemnification” insurance types (e.g. Home, Life, Auto)  familiar to most consumers. Parametric insurance involves a special type of financial contract that transfers money to policyholders upon the occurrence of specific, predefined events.

Parametric insurance contracts define the characteristics or thresholds of events that will trigger payments. Those characteristics are also known as the events’ “parameters” (thus the name “parametric.”)

In most cases, parametric payments are set amounts. For fairness, independent third parties determine whether or not the parameters for payment have been met.

Jumpstart policies are defined as parametric because the payments depend on the occurrence of a specified earthquake intensity as reported by the US Geological Survey.

Ideally, parametric insurance takes everything people love about insurance–the feeling of security and critical financial support when we most need it–and eliminates everything people hate–the documentation, delays, and disputes.

Is it really insurance?

Parametric contracts can be structured as insurance, but they’re not always written that way.

Jumpstart has intentionally structured our policies to qualify as insurance because insurance regulations provide strong consumer protections.

For a parametric contract to qualify as insurance, the triggering event must cause financial loss to the person receiving payment. In other words, the event must incur costs–the parametric payment offsets those costs.

In the example of a major earthquake, it’s easy to imagine that everyone in the area of intense shaking will need money for something related to the earthquake. Normal life will be disrupted in countless unpredictable ways, and that disruption creates expenses (not to mention headaches).

Parametric insurance makes the most sense when the event is severe enough, and the payment amount is low enough, that it doesn’t create a windfall (only a “jumpstart”).

As a counter-example, a parametric product where payment is triggered by an earthquake across the globe could not be characterized as insurance, since the earthquake was very unlikely to cause significant cost to someone far away.

Change your mindset, change your future

Parametric products could revolutionize how people protect themselves and their families. Conventional insurance thinking says, “I could lose everything, and if that happens, I want to be made completely whole again.” Is the attempt to secure every single valuable (and invaluable) possession sustainable? And at what cost?

Parametric insurance offers a different mentality, letting you re-frame a bad situation in terms of opportunity and resilience: “Life is unpredictable and bad stuff happens. It might be hard, but I will adapt, and this money will be instrumental in helping me adapt.”

Along those lines of recovery and resilience, parametric insurance might become a powerful vehicle for financial inclusion, i.e. appealing to people who would otherwise “go bare,” without any catastrophe protection at all. When insurance becomes more broadly affordable and accessible, more people will get money they need to survive and thrive after a major disaster.