LONDON:
More than $1.3 billion of InsurTech funding was completed during Q3 2018, double the figure from the previous quarter. While individual investment rounds were larger, the number of transactions reported declined 20% to 57, according to the new Quarterly InsurTech Briefing from Willis Towers Watson, the leading global advisory, broking and solutions company, Q3 saw eight transactions over $40 million, up from six, and the continued active participation of (re)insurers. The pipeline of InsurTech partnerships remains very strong.
The latest Briefing focuses on how InsurTech companies are deploying parametric structures, which unlike indemnity-based insurance pay out a predefined sum based on a trigger chosen as a proxy for an actual loss. Parametric products align the interests of insurers and insureds in a way which traditional indemnity covers do not, by removing the parties’ respective incentives to manage down or inflate claims. Parametric insurance is also substantially simpler than indemnity products, since it does not require costly claims handling. With parametric insurance, frictional costs can be very low.
Some InsurTech firms have acknowledged these benefits and combined technology and information within parametric or event-based insurance structures to address existing inefficiencies or coverage gaps. They use a combination of third-party and proprietary data, advanced sensors, and the capabilities of the Internet of Things to develop a new paradigm of insurance offerings for the connected world. The Briefing looks in detail at several examples, including companies using parametric structures to cover the risks of earthquakes, travel disruption, flash flooding, and horticulture.
“The impact of parametric insurance can be much more profound than simply lowering frictional costs and mitigating the potential for fraud,” says Rafal Walkiewicz, Chief Executive Officer of Willis Towers Watson Securities. “First, the use of parametric insurance encourages conversation around risk mitigation. Second, the simplicity of parametric insurance facilitates a decoupling of the various functions of the industry value chain and it allows for modularization.”
Dr Magdalena Ramada, Willis Towers Watson Senior Economist, says: “When automated correctly, besides being increasingly economical to deploy, parametric products are an important tool to access underserved segments and bridge coverage gaps. Their underlying policy structure and digital nature fundamentally reduce the complexity and frictional costs of traditional insurance, allowing for the simplicity, scalability and flexibility needed to cater to most of these markets.”