08 Jul 2020
Posted in Insurance
COVID-19 insurance gap creates opportunity for parametric model, says GlobalData
COVID-19 has highlighted that the majority of businesses had no insurance protection against pandemics, even if they held a business interruption policy, which has created an opportunity in the market, according to GlobalData, a leading data and analytics company. One startup, Machine Cover, is looking to capitalize by offering parametric insurance to provide protection to businesses in future periods of major economic downturn.
GlobalData’s 2019 UK SME Insurance Survey found that 17.3% of UK small and medium-sized enterprises (SMEs) held business interruption policies last year. However, the majority of these policies do not provide cover for pandemics, which has led to tension between businesses and the insurance industry. Parametric insurance can help form part of the solution to prevent this from happening again in the future.
Parametric insurance operates on the premise that once a certain event is triggered, a payout is automatically issued to the policyholder. According to Machine Cover, its policy will automatically pay out once there is a very significant decline in economic activity. However, there will be significant challenges in delivering such a solution.
When businesses were forced to close their doors across the UK to reduce the spread of the virus, insurers received an influx of claims on business interruption policies. In order to pay these claims, insurers would need to hold large amounts of liquid assets. The Association of British Insurers expects its members to pay out £900m in business interruption-related claims as a result of the COVID-19 pandemic.
Yasha Kuruvilla, Insurance Analyst at GlobalData, comments: “Given that only a minority of companies have cover against pandemics, the cost to insurers if the majority of businesses were covered would be exorbitant. This limits the efficacy of the traditional insurance model when dealing with pandemics. Parametric insurance could be a good starting point in navigating some of the insurance issues that have become apparent. Since payouts are based on a clear, measurable statistic that is agreed upon by both parties, there is no grey area regarding whether a claim should be paid or not.
“While it is unlikely that one insurtech will be able to hold the required capital to successfully protect businesses against future pandemics, using the model of parametric insurance to do so is certainly worth considering moving forward.”