FRAUDS UNLIKELY
The biggest fear for insurance is frauds. How fraud-prone is parametric insurance? Fraud is not at all possible in such products, since insured has not even a slightest control on claim incidence, argues Adarsh Agarwal. Since they are very transparent, parametric products are less prone to frauds, argues Singhel. Besides, payments are made upon the occurrence of a triggering event and the triggers are pre-defined and measurable.
“An independent third party is pre-agreed from where data source would be collected to measure exceedance of parameter threshold and accordingly pre-defined and quick pay-out is made,” he explains further.
According to Sreedhar, even in more developed markets, these products are currently niche products and are specifically designed to suit the needs of the insured exposed to natural, catastrophic perils and the product design takes into account exposures, past history of losses and modelling outputs, triggers, payouts and pricing for the set triggers, which is normally high. Claim payouts are made based on defined triggers and there is pre-defined clear-cut understanding of what the triggers are and the basis of reckoning them. “Therefore, I do not think these products are more prone to fraud,” he claims.
Shreeraj Deshpande has a different explanation: “The parameters for the parametric insurance products come under the third party, so neither the insured nor the insurance company has control over this parameter. So, chances of frauds are removed.”
Pointing out that insurance frauds are universal in nature, Balaji Cuddapah highlights that parametric insurance does away with elaborate claim adjusting process and are faster in disbursing the payout. “As the payout is dependent on occurrence of an event rather than magnitude of the loss, it is assumed that frauds are lesser here,” says he.
All the respondents so far have given a very positive perspective. Nirmal Bhattacharya, deviates slightly: “Since no assessment is required following loss for such products and preagreed pay-out is made to the client in case of any deviation from the trigger point, possibility of fraud may not be ruled out. However, such situation can be avoided by close monitoring of the insured portfolio.”
Adds Ravichandran: “The advantage in this type of insurance is that it avoids adverse selection, which eliminates issues at the time of claim. As it is the case in any other product, monitoring and administration of such products is important.”
The risking risks to business from all kinds of natural calamities and extremities, the grit with which insurance companies are innovating, the ability to use analytics to underwrite parametric products, the easy availability of a wide variety of data, the rising levels of digitization and automation – all these factors are coming together in 2020 to create tremendous opportunity for parametric insurance to emerge as a practical alternative to traditional insurance.
Banking Frontiers will continue to unveil more stories on parametric insurance and other such new opportunities.