Parametric insurance dates back several decades. There was a need for more efficient and timely risk transfer mechanisms. A suitable parameter or index is any objective measure that is correlated to a specific risk and ultimately to a financial loss for the insured. This is a “measurable index” related to a “scenario”.

Parametric insurance covers the probability of a predefined event happening instead of indemnifying the actual loss incurred. Simply put, if a weather event occurs within a radius of your hotel or property, you can get paid without having an actual loss.

Two Critical Components to Parametric Insurance

  • The Triggering Event
  • The Pay Out Mechanism

Triggering Events

The triggering event for our purposes is weather related windstorms. Third-party sources provide accurate measuring and documented evidence for each weather event.

  • Corelogic – Hail
  • Moody’s RMS Hwind – Wind
  • National Hurricane Center – Hurricane
  • Storm Prediction Center – Tornado
  • US Geographical Services – Quake

These companies use satellites, airplanes (hurricane hunters) and various other scientific measuring techniques and create a print out for every 1 x 1 kilometer grid. They are accurate and reliable and not affiliated with the insurance companies issuing policies. They provide a factual, clear assessment of what happened.

How Parametric Insurance is Paid Out

Payout is based on a table written in the policy and NOT tied to an actual loss.

Parametric Insurance should supplement traditional hotel insurance, not replace it! — Source: Cayuga Hospitality ConsultantsParametric Insurance should supplement traditional hotel insurance, not replace it! — Source: Cayuga Hospitality Consultants
Parametric Insurance should supplement traditional hotel insurance, not replace it! — Source: Cayuga Hospitality Consultants

Policies may contain terms of the payout. You may have to submit proof to the insurance company that you spent the entire amount paid out to restore the location after the event. A knowledgeable broker can offer advice on how to achieve this easily.

Advantages of Parametric Insurance

Parametric insurance provides advantages in terms of speed and transparency, but it may not cover all aspects of losses incurred by an insured event. Ask questions, run specific scenarios for your location and read the policy! It is incumbent on you to become fluent in the coverage and the only way to accomplish this is to carefully review the terms and conditions and understand the scope and limitations of coverage.

Companies that Provide Parametric Insurance for Hotels

Here are a few well-known insurance companies and reinsurers that have provided parametric insurance solutions:

  • AXA
  • Allianz
  • Aon
  • Arbol – an insurtech company focused on parametric insurance.
  • Hartford
  • Munich Re
  • Swiss Re
  • Swissquote – the Bank

The concept is simple to understand. If the measuring device indicates a definitive wind speed in your covered area, you get paid. If you are not having this conversation with your broker, you need to start one.

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