Parametric insurance: The quick and transparent alternative to traditional cover

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Subscribe to enjoy similar stories. Parametric insurance, also known as index-based insurance, is a type of cover in which the insurance company and customer agree on a sum that will be paid out if a specific event occurs. The event must be measurable, and for the payout to be made, its intensity must meet or exceed a pre-agreed parameter or index, such as wind speed, rainfall, or earthquake magnitude.

Unlike traditional insurance, parametric insurance does not involve risk assessment or loss evaluation. Instead, it relies on trigger points. The insurance company and the insured agree on a parametric index, assuming that when an event is of a certain magnitude, there is a high likelihood of financial loss for the insured.

If such an event occurs, the insurer makes the payout as outlined in the contract. This approach enhances transparency, accelerates claim payments, and provides immediate financial relief to the insured. Also read: Is Niva Bupa’s IPO the right prescription for growth? Let’s understand this with the example of the Indian government’s Weather Based Crop Insurance Scheme (WBCIS), which harnesses parametric insurance.

The scheme aims to protect farmers from financial losses caused by extreme weather conditions related to rainfall, temperature, wind, humidity and so on. Suppose the index for heavy rainfall is set at 12 mm per hour. When rainfall in the insured area exceeds this threshold, the payout is triggered.