Ethical and Regulatory Considerations in Parametric Insurance
Expert-defined terms from the Certified Professional in Parametric Insurance course at Stanmore School of Business. Free to read, free to share, paired with a globally recognised certification pathway.
Actuarial science #
The discipline that applies mathematical and statistical methods to assess risk in insurance, finance, and other fields. In parametric insurance, actuarial science is used to determine the probability of a parametric trigger event and the likely cost of the associated losses.
Adverse selection #
A situation in which one party in an insurance contract has more information about the risk than the other party, leading to a disproportionate number of high-risk individuals purchasing coverage. In parametric insurance, adverse selection can be mitigated by using objective and verifiable parametric triggers that are not easily manipulated by insureds.
Basis risk #
The risk that the parametric trigger event will not accurately reflect the actual losses experienced by the insured. This can occur when the parametric trigger is not closely correlated with the insured's losses, or when the trigger is triggered but the insured's losses are below the indemnity threshold. Basis risk can be minimized by carefully selecting parametric triggers that are highly correlated with the insured's losses and by setting appropriate indemnity thresholds.
Catastrophe bonds #
A type of insurance-linked security that transfers a specified portion of the risk of a catastrophic event to investors. Catastrophe bonds typically provide parametric coverage for events such as hurricanes, earthquakes, or tornadoes. In exchange for assuming a portion of the risk, investors receive a return on their investment.
Data privacy #
The practice of protecting personal information from unauthorized access, use, or disclosure. In parametric insurance, data privacy is a key consideration when collecting and using data to determine parametric trigger events. Insurance companies must ensure that they comply with relevant data privacy laws and regulations, such as the General Data Protection Regulation (GDPR) in the European Union.
Disaster recovery planning #
The process of creating a plan for restoring business operations after a disaster or other disruptive event. Parametric insurance can be a valuable tool in disaster recovery planning, as it can provide quick and efficient payouts to help businesses recover from losses caused by parametric trigger events.
Event #
based insurance: A type of insurance that provides coverage based on the occurrence of a specific event, rather than the actual losses incurred by the insured. Parametric insurance is a type of event-based insurance, as it provides coverage based on the occurrence of a parametric trigger event.
Excess of loss reinsurance #
A type of reinsurance that provides coverage for losses that exceed a specified threshold. In parametric insurance, excess of loss reinsurance can be used to transfer a portion of the risk to a reinsurer, providing additional capacity and reducing the risk of large losses for the insurer.
Fat #
tail risk: A type of risk that has a higher-than-expected probability of extreme events. Parametric insurance can be a useful tool for managing fat-tail risk, as it can provide coverage for extreme events that may not be covered by traditional insurance policies.
Indemnification #
The process of compensating a party for their actual losses or damages. In parametric insurance, indemnification is typically based on a pre-determined payout schedule that is triggered when a parametric trigger event occurs.
Index #
based insurance: A type of insurance that provides coverage based on the value of a specified index, such as a commodity price index or a weather index. Parametric insurance is a type of index-based insurance, as it provides coverage based on the occurrence of a parametric trigger event.
Moral hazard #
A situation in which one party in an insurance contract has an incentive to take greater risks because they are insulated from the consequences. In parametric insurance, moral hazard can be mitigated by using objective and verifiable parametric triggers that are not easily manipulated by insureds.
Parametric trigger #
A specific event or condition that, when met, triggers coverage under a parametric insurance policy. Parametric triggers can include weather conditions, natural disasters, or other objective and verifiable events.
Reinsurance #
The practice of insurance companies transferring a portion of their risk to other parties, typically other insurance companies or specialized financial institutions. In parametric insurance, reinsurance can be used to transfer a portion of the risk to a reinsurer, providing additional capacity and reducing the risk of large losses for the insurer.
Risk management #
The process of identifying, assessing, and mitigating risks. Parametric insurance can be a useful tool for risk management, as it can provide coverage for specific risks that may not be covered by traditional insurance policies.
Structured finance #
The practice of creating and trading financial instruments that are tailored to specific risks or investment objectives. Parametric insurance can be a component of structured finance, as it can provide coverage for specific risks that can be bundled into financial instruments and traded on financial markets.
Swiss Re #
A leading global reinsurance company that provides a range of risk management solutions, including parametric insurance. Swiss Re is known for its innovation and expertise in the field of parametric insurance, and has developed a number of parametric insurance products for a variety of industries and risks.
Weather derivatives #
Financial instruments that provide coverage for weather-related risks, such as temperature, precipitation, or wind speed. Weather derivatives can be used to hedge against weather-related risks or to speculate on weather conditions. Parametric insurance is a type of weather derivative, as it provides coverage based on the occurrence of a parametric trigger event.
Workers' compensation parametric insurance #
A type of parametric insurance that provides coverage for workplace injuries or illnesses. In workers' compensation parametric insurance, indemnity payments are triggered when a specified parametric trigger event occurs, such as a certain number of workplace injuries or illnesses within a specified time period.
Zurich Insurance #
A global insurance company that provides a range of insurance products and services, including parametric insurance. Zurich Insurance is known for its innovation and expertise in the field of parametric insurance, and has developed a number of parametric insurance products for a variety of industries and risks.