Although many organisations had a form of business interruption insurance within their commercial cover prior to the Covid-19 pandemic, FloodFlash co-founder Adam Rimmer tells Insurance Times how a parametric insurance model would have been the better option for this type of insurance, as ’there’s no small print for the insurer to hide behind’
Business owners financially affected by the ongoing Covid-19 pandemic and the lengthy national lockdown would have been better served by parametric insurance rather than relying on business interruption (BI) cover, as ”there’s no small print for the insurer to hide behind” says Adam Rimmer, co-founder at insurer FloodFlash.
When prime minister Boris Johnson implemented the UK-wide lockdown back in March, many businesses - especially within the hospitality sector - were required to close to help mitigate the spread of coronavirus.
Business owners turned to their BI extensions, often found within commercial combined policies, to recoup their Covid-related losses. But for many, this was to no avail, in turn leading to last month’s FCA test case, which was designed to explore the clarity of BI policy wordings.
Rimmer describes this situation as “remarkable”, however he also said that parametric insurance would have been the safer option for businesses looking to receive a claim pay out for this situation.
He told Insurance Times: “When business interruption happened it was insurance’s time to shine and save these enterprises, but then [insurers] all start pointing to the small print saying ‘we do not cover this’. What’s the point of business interruption insurance that excludes all the things that interrupts your business?
“Whereas with parametric insurance, those business owners would know that as long as [the] trigger for your insurance is good and correlates with the interruption well enough, the business owner understands that when this happens, this will be getting paid. There’s no small print for the insurer to hide behind. It fosters trust, everybody knows what is happening, it’s super clear and transparent.”
Transparency and simplicity
There are several advantages to parametric insurance, including its speed, transparency and simplicity.
For example, a normal parametric policy is only three pages long on average – a fraction of the size compared to a property insurance policy.
This simplicity helps to improve customer understanding, Rimmer adds. “That means business owners know what they are getting covered for and they can then manage their own risk properly,” he explains.
Parametric insurance is also faster to action ”because there is no loss adjusting process”.
This speed is crucial if business owners are looking to their insurers for a prompt pay out in order to remain operational for the future.
Rimmer says that if every small business owner was asked whether they wanted a pound-for-pound payout for Covid-19 losses - which would be the case with BI insurance - or an amount paid on the day that the catastrophe started, such as if the insured had parametric insurance, Rimmer reckons that all SMEs would choose the latter.
“Having that resource for your business is so valuable in making sure that business survives; this is why parametric insurance is so important in solving this problem,” he emphasises. ”The other advantage to parametric insurance is transparency – it’s very clear when X happens you are getting paid Y.”
Rimmer notes Storm Ciara, back in February, as an example where the speed of claim settlements helped businesses stay open, as claims were paid within a day or so. However, Storm Ciara affected only certain regions, making this speed possible. The widespread nature of Covid-19 makes speed of settlement a harder task to accomplish without the simplicity of a policy such as parametric insurance.
He explains: ”Those businesses were able to survive because of the speed of cash flow, but now for the first time almost every business has gone through a catastrophe.
”When a true catastrophe strikes, it is a different prospect to having equipment damaged or a broken window – the business has to actually stop operating.
“The point of commercial insurance is to help that business to survive; if it takes too long, that business won’t survive and there is no point having that insurance.”
However, the problem is that Covid-19 is newly classified as a notifiable disease and would therefore not have been considered as a trigger prior to the pandemic. In answer to this, Rimmer believes that parametric insurance triggers should be linked to economic activity rather than the loss-making event itself - this way, the cover can accommodate unforeseen circumstances.
Rimmer adds: “We didn’t see [the pandemic] coming. It came and now if we focus on solving that unforeseen problem, we are not thinking about the next unforeseen problem. Therefore, the skill is to come up with a trigger that can capture losses even if the event itself is unforeseen. So, the trigger has to be something that is more linked to economic activity than the event.”
An example of this economic activity would be data sets from bookings. Rimmer warns against over optimising for the event as it could create the same problem again.
Machine Cover, for example, launched a parametric cover for business interruption in July that is linked to economic activity.