categorytitle / Research Update .
  • time : 11:9:20
  • Date : Tue Jul 28, 2020
  • news code : 4402
Faster Loss Payment and Lower Operational Costs: The Key Benefits of Parametric Insurances
Due to their fast pace in payments and low costs in operations, parametric insurances are viable option for improving strategies and leveraging the nation’s capacity while facing with natural catastrophes and their negative aftermaths.

A recent study conducted at IRC, entitled “Feasibility Study Report on Parametric Insurance Offerings in Iran”, deals with the relevant mechanisms in order to offer parametric insurances in the country. The report reviews the benefits and challenges of parametric insurance and the experiences of some countries in developing such insurance products.

As stated in the report, pertaining to two rankings of the World Risk Index of Natural Disasters, Iran is considered as a low risk country in terms of “exposure risk” and is average with regard to “vulnerability risk”. Vulnerability risk comprises of three indices: preparedness for perils, responsiveness in facing with natural disasters, and resilience. Iran holds respectively very low, high, and average level in these indices. The report states that the major weakness of the country resides in long-term responsive capacity and resilience. This is where insurance is one of the best options to tackle such challenges.

According to the results of the report, other than government grants, one of the present strategies for compensating for the losses incurred for the households stricken with the natural disasters is P&C insurance that has a very low penetration rate in Iran. Agricultural Insurance Fund offers limited index-based or parametric insurance for the losses incurred for the farmers and their crops. This however does not compensate for the losses related to other affected parties such as crop processors and retailers. Thus, offering parametric insurance as a commercial insurance has been the focus of the Central Insurance of I.R. Iran (Insurance Supervisory and Regulatory Authority of I.R. Iran).

Based on this report, the most significant benefits of parametric insurances are rapid loss payments, low operational costs, broader coverage even for all the affected parties, more flexibility, lower transactional costs, and an enhanced coverage choice for the business interruption risk.

Some of the upcoming challenges for the parametric insurances are the presence of a basis risk due to the improper determination of the targeted parameter, no coverage for the real losses (just providing cash needed after the natural catastrophe events), and difficulty in training potential customers due to low insurance literacy in Iran. It is obvious that one of the best strategies to offer parametric insurance is to utilize blockchain and smart contracts. Nevertheless, the hardships connected with creating blockchain (given the inadequate communication and technological infrastructures) and lack of legal mechanisms for smart contracts are other relevant challenges in this regard.

The Persian full text of the research report is available at this link.

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