Parametric Insurance

Parametric Insurance

Parametric insurance, by definition, doesn't pay the insured person the entire amount of the value of the lost property.  Instead, parametric insurance pays only part for part of the losses upon the occurrence off the event that brought on the losses such as a hurricane or earthquake. 

Parameter insurance normally pays based on scales.  For example, some firms base the amount they pay off wind speeds and they pay if they wind speed is above a certain speed and damage is reported.  Other insurers use the Richter Scale for earthquake damage.  They can also use storm categories in the case of hurricanes, 1 being the lowest and 5 being the highest.  Some insurers even use things like death tolls.

One of the great things about parametric insurance is that it is speeds and effective.  There is no need for anyone from the insurance agency to come out and investigate and judge how much damage is done, nor is there any need for an extensive amount of investigation in to damage done by a private company.  Most of the sums are predetermined and based off reports that are not funded by either the insurer or the insurance company.  In this sense it saves money.  It certainly cuts back on paper work and confusion, complications and is a real time saver and can allow the insurance company to act a lot faster.

How Much is Paid?

As mentioned before the amount paid is based on an agreement made before hand and then basically works like an equation where the amount of property and the severity of the disaster are taken in to account.  It is essentially an estimate, where the insurance companies agrees to pay an amount that is reasonable based on assumptions of the amount of damage that would likely be done during a disaster of a set scale.

For example, lets say you own 100 acres of land that you use to grow corn.  Lets say that all of your land is covered by an insurance company whose parametric insurance covers tornado damage.  Now lets say a tornado hits your property.  The insurance company would look at the severity of the tornado itself.  In other words they would look at the Fujita Scale, or F-scale as it is more commonly known, and would say for an F-1 tornado to that amount of property would warrant a certain amount of money and an F-5 (very severe) would warrant a certain amount of money, likely to be a lot more as it would cause significantly more damage.