What Is Parametric Insurance?

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Parametric insurance pays out based on whether or not an event, such as a natural disaster, happens within the parameters of your policy. If you are a homeowner, parametric insurance can be a good tool for protecting yourself from natural disasters, especially if you live in a high-risk area.

How does parametric insurance work?

Most kinds of insurance reimburse you for the cost of damage (for instance, damage to your home after a windstorm). But parametric insurance pays if a particular event occurs, whether or not there's damage.

Events commonly covered under parametric insurance

  • Floods
  • Earthquakes
  • Travel delays
  • Severe storms

For example, if you live in an earthquake-prone area, you could buy a parametric policy that pays $10,000 if there's an earthquake over 5.0 on the Richter scale where you live. If an earthquake that big does happen, you'll get the money automatically, regardless of whether your home has $10,000 of damage, $100,000 of damage, or no damage at all.

Another common type of parametric insurance is life insurance. Those policies pay out if the person named dies.

Events typically need to meet certain measurements to pay out. For an earthquake, it'd likely be the United States Geological Survey strength. For travel delays, it could be a number of hours or days your trip is delayed, as measured by the airline. If the number is hit, you get paid; if not, you don't get anything.

How parametric insurance is different from home insurance

The biggest benefit of parametric insurance is that you can buy a policy for lots of events that might not be covered by a typical homeowners policy, such as flooding or volcanic activity. Or parametric insurance can protect you from things outside your home, such as unexpected delays while traveling.

Another benefit of parametric insurance is how quickly claims may be paid. Usually, you'd need to get your home inspected by an adjuster, get estimates from contractors and, in some cases, have the work completed before being fully reimbursed. However, with a parametric policy, you'll be paid as soon as the company can verify the event occurred. This means payouts can take days or a few weeks, not months.

Parametric insurance vs. homeowners insurance

Benefits of parametric insurance
Benefits of homeowners insurance
Fast payout (days or weeks, not months)Covers a wide range of common types of home damage
No deductibleIncludes liability coverage
Can cover nearly any kind of eventMuch more affordable

This is especially useful in widespread disasters, when hundreds or thousands of claims can bog down the system and lead to months of delays.

Parametric insurance policies also don't have deductibles, exclusions or adjusters to determine damage, so making a claim is very simple.

When should I consider parametric insurance?

Parametric insurance is most useful in two situations: when you can't get coverage elsewhere or need payouts fast.

When you can't get coverage elsewhere

If your home is at very high risk of damage from a specific event, you may not be able to get a typical homeowners insurance policy — or only get one excluding that event. For example, homeowners might not be protected from wildfires in California or hurricane wind damage in coastal Florida.

Other events aren't covered by any insurance or only covered with very expensive extra policies. This includes things like volcanoes and earthquakes.

In these cases, you could likely buy a parametric insurance policy to help protect against losses.

When you need payouts fast

If you're concerned about being paid quickly, parametric insurance could be beneficial. Suppose you live in an area prone to hurricanes, and your roof is damaged by a storm. Even if your homeowners policy covers wind damage, getting an adjuster to inspect your claim and then fixing your roof may take weeks or months.

On the other hand, if you have a parametric policy that pays out anytime there's a category 3 or higher storm, you'd be paid soon after the storm.

However, given the cost of parametric insurance and the fact you likely need homeowners insurance anyway, it's usually best to buy only a few thousand dollars of coverage to act as a stopgap before your homeowner insurance kicks in.

To help meet a high deductible

Some parametric policies work together with your homeowners insurance to help you meet your deductible. This is common for homeowners whose properties are at a high risk of one event, such as flooding, earthquakes or hurricanes.

For example, you might have a regular deductible of $2,000 but a hurricane deductible of $20,000. A parametric insurance policy tied to a hurricane could help you pay that deductible so it's not all out of pocket.

When not to get a parametric insurance policy

Parametric insurance isn't a catchall replacement for a homeowners policy. If you buy parametric insurance, you're only protected against one specific event that meets explicit criteria.

While regular homeowners insurance protects you against a wide variety of damage sources, each parametric policy only covers one thing. So, for example, if you wanted to protect yourself against fire, theft and wind damage, you'd need three separate policies. One homeowners policy would cover all three of these.

Plus, parametric insurance likely won't cover any homeowners insurance requirements you have from a homeowners association or mortgage company, for instance.

How do I get parametric insurance?

Since it's a fairly small market, getting a policy may be a challenge. For the most part, the only way to buy parametric insurance is to have an insurance agent design one for you.

Editorial Note: The content of this article is based on the author's opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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