Page 11 - Turkinsurance Digital Magazine

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Consumers increasingly show interest in parametric

insurance products which are developed for low-
probability but high-cost risks and are generally
preferred for damages that can be caused by
natural disasters. After seeing the first sample of

parametric insurance in the Caribbean’s, a nest
for natural disasters; they continue to become
increasingly more popular around the world.

Catastrophic risks are among the most important global risk categories
of today’s world. Climate change, global warming, severe earthquakes,
floods, and storms around the world have increased the need for protection
against catastrophic risks on both personal and corporate levels. Recently,
parametric insurance products have become the first solution that come to
mind when talking about catastrophic risks.

Parametric insurance is a type of insurance that makes payments to the
policyholders in case the parameters listed in the insurance policy have
occurred, regardless of the existence of a financial loss or not. In these
policies, what matters is the triggering element. Unlike traditional insur-
ance policies, parametric insurance policies consist of a list of parameters.
Specific parameters in those lists generally include the types of natural dis-
asters and their values. For instance, let’s say that a parametric insurance
policy states that 1 million USD will be paid to the policyholder in case of
an earthquake measuring 7.0 or higher on the richter scale. An earthquake
of 7 in magnitude occurs in the area where your company is located; but
thanks to the precautions you have taken, your financial loss only equals to
50 thousand USD. However, since the parameter listed in your policy has
occurred, your insurance company is obliged to pay you 1 million USD,
regardless of the amount of your actual loss. Two actions to be taken by
your insurance company will be to check whether the magnitude of the
earthquake is included among the parameter types or values listed in your
policy, and to make you the payment, if the answer is yes. They will not
conduct any expertise or damage assessment activities or demand any doc-
uments; they will make sure that you receive your claims payments within
the timeframe described in your insurance policy.
Parametric insurance products are preferred
more and more

The biggest advantage of parametric insurance compared to traditional
insurance products can be summarized as being easy and rapid to issue pol-
icies and make compensation payments. Unlike traditional insurance poli-
cies, parametric insurance policies specify the coverage with narrower and
clearer definitions. This means that instead of the classical coverage defi-