Covid-19 insurance gap creates opportunity for parametric model, says GlobalData

Market intelligence firm GlobalData has argued that the lack of business interruption insurance protection against pandemics such as coronavirus (Covid-19) has created a gap in the market that alternative models could fill.

GlobalData pointed to the example of insurtech Machine Cover, which is offering parametric insurance to provide protection to businesses in future periods of major economic downturn.

Last year, 17.3% of UK small and medium-sized enterprises (SMEs) held business interruption policies, but the majority do not provide cover for pandemics, according to GlobalData’s 2019 UK SME Insurance Survey, leading to well-documented tension.

Parametric insurance operates on the premise that once a certain event is triggered, a payout is automatically issued to the policyholder.

According to Machine Cover, its policy will automatically pay out once there is a very significant decline in economic activity. However, there will be significant challenges in delivering such a solution, GlobalData said.

When the UK entered lockdown in March and businesses were forced to close their doors to halt the spread of Covid-19, insurers received an influx of claims on business interruption policies. In order to pay these claims, insurers would need to hold large amounts of liquid assets.

The Association of British Insurers expects its members to pay out £900 million in business interruption-related claims as a result of the Covid-19 pandemic.

Yasha Kuruvilla, insurance analyst at GlobalData, said: “Given that only a minority of companies have cover against pandemics, the cost to insurers if the majority of businesses were covered would be exorbitant. This limits the efficacy of the traditional insurance model when dealing with pandemics.”

“Parametric insurance could be a good starting point in navigating some of the insurance issues that have become apparent. Since payouts are based on a clear, measurable statistic that is agreed upon by both parties, there is no grey area regarding whether a claim should be paid or not.”

“While it is unlikely that one insurtech will be able to hold the required capital to successfully protect businesses against future pandemics, using the model of parametric insurance to do so is certainly worth considering moving forward.”