Parametric insurance is a new and innovative form of insurance offering higher payouts for specific events observed Bahaa Abdul Hussein. While parametric insurance is becoming popular and widespread, there are many challenges and limitations. We explore the different challenges and look at how the industry could overcome them.
Challenges and Limitations in Parametric Insurance
While the benefits of parametric insurance are many, there are also challenges and limitations. It is important to know about these challenges and limitations to understand parametric insurance can be made to work better.
- Lack of awareness
The principal challenge in parametric insurance is the lack of awareness. People are not aware of parametric insurance and do not clearly know how it works. Most people, including agents are comfortable with traditional insurance products. The lack of awareness makes them hesitate to adopt this new insurance concept.
- Risk basis
Unlike traditional insurance, parametric insurance works on the basis of trigger events. Rather than focus on the loss, parametric insurance focuses on the event that has occurred. Data is the key for payouts under parametric insurance. The use of analytics makes it easier, but more needs to be done on this count.
- Distribution cost
In insurance, the cost of distribution is high due to the presence of agents and intermediaries. They are essential to reach out to customers and convince them of parametric insurance. Since this is a new form of insurance, a lot of convincing along with education is needed. Many people buy parametric insurance as additional insurance and hence expect lesser costs. The challenge is in setting an attractive price for customers.
- Regulatory concerns
Since parametric insurance is new, there are not many clear regulatory norms about it. There are even risks of fraud that need to be overcome. There are also concerns that a trigger event (eg: flood) could lead to payout even though the customer has suffered no loss. A proper regulatory framework is needed for parametric insurance. Clarity will ensure greater trust among customers and other stakeholders.
Overcoming the challenges and limitations
Increasing awareness about parametric insurance is essential. It is the principal way of overcoming the challenges and limitations of this innovative form of insurance. It is also required to have clear regulatory norms about parametric insurance. Effective regulation will create greater confidence among the public and help in overcoming limitations. It is important that players in this sector are proactive in dealing with the challenges to ensure better growth.
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