Parametric insurance could help solve the U.S. insurance industry’s struggles with floods, earthquakes, and other catastrophic weather events

As the P&C Insurance industry continues to grapple with unprecedented losses—totaling over $57.6 billion in the U.S. alone this year—caused by catastrophic weather events, many insurers are now taking more drastic loss mitigation measures. In states considered to be at the mercy of “rapidly growing catastrophe exposure” such as California and Florida, many insurers—including high-profile firms like Farmers, State Farm and USAA—were forced to issue nonrenewal notices or withdraw coverage entirely to stay afloat. Insurer pullouts and rising property insurance premiums have left an estimated 39 million homes in the U.S. underinsured and 6.76 million U.S. homes face “such great risk” that they have been deemed uninsurable altogether. In the face of such a climate crisis, insurers and insureds alike are looking to market innovation and technological advancement to rebalance the property insurance market.

A viable solution lies in parametric insurance, an index-based insurance model that guarantees a pre-defined payout based on the intensity of a catastrophic weather event. Parametric polices have an additional advantage as they often rely on forward-thinking data modeling to predict the likelihood of a future disaster event and influence the terms of the policy. Traditionally, parametric insurance policies were purchased almost exclusively by commercial insurance policyholders, but as more and more property owners find themselves uninsured, several new firms—such as Jumpstart and Recoop—have sprouted up to fill the coverage gaps in the private sector.

Jumpstart offers parametric earthquake insurance on West Coast

Jumpstart offers earthquake insurance to residents in Oregon, Washington and California—areas that are at especially high risk for earthquake events and therefore have been hit hard by rising premiums and coverage pullbacks. Jumpstart’s business model is simple: their quote tool pulls United States Geological Survey (USGS) data to generate a monthly rate based on the user’s location (represented by their ZIP code). In the event of an earthquake, “payment eligibility is based on shaking intensity” meaning that affected residents living in an area that experiences a “peak ground velocity of 30 centimeters per second or more” automatically receive $10,000 regardless of actual damage suffered; no claims process or adjuster required.

A screenshot of Jumpstart's quote tool
Jumpstart’s Earthquake Quote Tool for Individuals

Recoop offers hybrid natural disaster insurance

Alternatively, Recoop Insurance employs a hybrid “parametric-like” insurance model to fill coverage gaps in the troubled property insurance market. Founded specifically to meet the needs of property owners in the wake of Hurricane Katrina, the firm offers a lump-sum payment in response to a nationally declared natural disaster. Unlike other parametric insurers however, the firm requires that the client sustain damage beyond a “$1,000 damage threshold” and retain an existing homeowner’s or renter’s insurance policy to be eligible for a payout. By basing the payout on the damage sustained, Recoop Insurance borrows conventions from traditional insurance firms but still offers a guaranteed payout like other parametric insurers. Recoop’s marriage of traditional and parametric policy features may work as a framework for other insurers to successfully hybridize their business models in the future.

The results page from Recoop's quote tool
Recoop Quote Tool

The unique qualities of parametric insurance— including the inclusion of the client in the policy creation process, reliance on objective data modeling and expedition of an explicitly defined payout–may not only allow the insured to better recover from a disaster event but also may serve to ease the dissatisfaction felt by property owners that feel neglected by their previous insurer. Additionally, index-based insurers can more accurately prepare for a disaster event, as they can roughly estimate the funding needed by referencing pre-agreed contracts in effect at the time of the event. This model negates the underinsurance issue at hand (as payouts are not based on actual losses), better enables the insured to quickly recover, and keeps insurers ahead of the funding crisis that is currently plaguing the property insurance market. Therefore, parametric insurance may be the innovative solution the private property insurance industry needs to meet the surmounting climate risk.