I can’t recall a time when business interruption insurance was covered as much in the press; or as negatively.
It is a long-standing paradox; policy wordings are difficult to understand for many customers and so, are often misunderstood or remain unread completely while insurers are reluctant to rewrite these tried and tested wordings which have evolved over time by precedent, so as to avoid inadvertently exposing themselves to unintended risk.
So, it is unsurprising then, that when the world’s most devastating pandemic hit, controversy ensued about what is, and is not covered, with both sides turning to their lawyers for redress.
No matter how this issue gets (or does not get) resolved the cost to the insurance industry will be far greater than the number in the P&L or this year’s loss ratio. Trust is inherent for insurance to work; no-one is going to pay a firm to protect anything if they don’t believe that said firm will:
- Be around with enough money to cover losses and;
- That they will honour the terms agreed.
Non-payment of a presented claim, whether the denial is entirely lawful and cover was never intended or not, does create distrust and perpetuate the ideas that insurers are deliberately vague, that they attempt to wriggle out of claims whenever they can or; that they threaten mass bankruptcy and job losses if held accountable to the spirit of their cover.
So, in a new future, normal or otherwise, how do insurers ensure that businesses will have enough faith to pay hard-earned profits to transfer risk from their own balance sheets to those of an insurer?
The answer may lie in the much-hyped topic of parametric insurance.
Parametric insurance has the potential to build trust by creating absolute transparency. A parametric cover identifies an agreed, binary and often neutrally generated data point which, when met, triggers coverage and potentially the claim itself.
You have probably seen one of the many delayed flight policies, where should your flight be delayed by a set amount of time (for example one hour,) you are paid a fixed amount of compensation (for example £100.) The trigger for the delay is binary and sourced digitally and the amount needs no negotiation. With the right payment capability in place this can be completely automated so that a customer’s account is credited at the same time the delay takes place.
Fundamental to successful parametric covers, is that any trigger used must be:
- Absolute - Agreed and communicated in advance
- Binary – Not open to interpretation, jurisdiction or change
- Consistent - From a neutral and sustainable source, with no conflicting agenda and ideally experience and expertise in facilitating standards in collaboration
Greater access to quality data is already disrupting how insurance is designed, executed and underwritten.
Parametric insurance is potentially a win-win for insurer and policyholder alike. Clarity on cover means customers are not only likely to be better protected but also have accurate expectations of their insurance programmes and immediacy of payment when its most needed.
Insurers can ensure cover is as they intended, reduce the cost of claims handling and arbitration, can manage portfolios better using data and potentially benefit from the improved reputation that comes with transparency and informed customers (be they brokers or policyholders.)
Building on this foundation the possibilities for parametrics are only limited to the data points that underpin claims. Previously overlooked sources of data can now provide insurers with rich insights, enabling them to tailor covers and deliver transparency - ultimately enabling data-driven decision making and offering better customer experiences and operational efficiency.
An increasing part of my role is using Mastercard’s anonymised, aggregated and real-time payments data insights to help our insurance partners to assess and measure economic health and impact so we can design and build parametric cover for business interruption for SME businesses.
Whilst with risk, prevention is always better than cure; parametric insurance may mean that in the face of any future catastrophe, pandemic or cyber event, policyholders will not have to lie awake wondering if they are covered and when they might be paid, while insurers won’t have to worry about the headlines or impending litigation.
If the ‘new normal’ has taught us anything about insurance, it is that it needs some new thinking because, well the future isn’t quite what it used to be.