Many interested partners and clients have asked us why we decided to engage a parametric structure to build out a business interruption policy, which typically is indemnity based. We invite you to read this article which provides a bit of our rationale for why we think parametric is the best solution for the business interruption coverage gap.

How parametric insurance differs from indemnity insurance

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In an indemnification contract, claims are paid following a predefined event coming to pass: a car accident, a house fire, or loss of customs following a terror attack, to name a few. In most of these policies, the insurer needs to know the exact loss and often calls upon loss adjusters to survey the damage and provide an estimate of the claim. The process can be lengthy, requiring documentation and interpretation of coverage.

Parametric insurance, by contrast, pays claims without the need for post-event assessment. Claims are determined by observing the values of a predefined data index. When the index reaches a certain threshold the policy is “triggered,” the payment calculated, and then the claim promptly awarded.

For example, a farmer can protect herself against drought with a parametric insurance policy, based on a minimum level of rainfall. The policy can compensate the farmer when dry conditions would reduce crop yield and revenue. In such a policy, if rainfall falls below threshold while the policy is active, claims can be calculated based on the actual rainfall, and claims paid right away when the funds are most needed.

Weather-based parametric insurance has a rich history and many providers, from space-agencies to physical weather station owners. The indices are measured by these reputable and well-recognized independent third parties and underpin the claims calculation.

How OTT Risk works with parametric insurance

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OTT Risk borrows existing parametric structures from the weather market and applies the same logic to operational metrics relevant to an industry or company. Weather insurance may be based on the volume of rain; hurricane insurance on wind speed; earthquake insurance on the magnitude of tremors. With OTT Risk, we work to protect businesses from economic impact directly. Insurance can be based on measures such as the number of people visiting an attraction, the number of people traveling through an airport, tickets sold, severity of delay on shipping routes, or revenue-per-available-room in hotels, and more.

In other words, we are helping to extend the scope of existing insurance to provide relief from nearly any kind of event that disrupts the flow of people to a business or the flow of goods in a supply chain. Many industries rely on on-premise customers for their revenue, or rely on the timely delivery of raw materials or finished products. We help businesses by facilitating parametric insurance to cover various interruption scenarios leading to economic losses in those industries.