By now, if you are a regular reader of Coverage Corner, you are well-versed in how traditional insurance works: the policy is a contract between the insured and the insurer, or an HOA and the insurance carrier. The insured pays money to the carrier (a premium) so that, in the event there is a loss that meets the definitions of the policy, the carrier will pay the insured to repair the damages, up to a pre-specified amount.

We have often joked that “insurance is legalized gambling” because the carrier is gambling that they can collect premium without ever having to pay out on a claim, and if we are honest, so is the insured. Parametric insurance is even more like gambling. Let’s use an example of the game of roulette – we place a bet on red 7. If the wheel spins and lands on black 15, we don’t get anything. But if it lands on red 7, we win!

Parametric insurance is similar because the insurance policy would pay out if a certain condition is met. In the roulette case, it was the ball landing on red 7. With parametric insurance, it could be if a named wildfire encroaches past a set boundary or if an earthquake strikes within a certain distance of the insured location and of at least a certain measurement on the Richter scale. Even if there is no damage suffered by the insured, as long as the condition is met, the limit is paid out.

In the wildfire example, there would likely be a community map with a set boundary defined in the parametric policy. Should a named wildfire cross that boundary – even if it only burns a shrub and causes no other damage – then the policy would pay out the set limit. No claim paperwork, no adjustor, just confirmation that the boundary was penetrated, and that the wildfire met the set parameters. You can see how this is an attractive idea to both carriers (who don’t need to worry about all the detailed paperwork & claims adjustors) and insureds (who also don’t need to worry about all the detailed paperwork and claims adjustors).

You may have heard that the California Legislative Action Committee (CAI CLAC) has been working on a definition of wildfire for a few years now. This is a perfect example of how it could be used. In future months, we will go into further detail on the wildfire definition, other examples of how it could be used, and the status of CLAC’s project.

Terri Guest, CIRMS, CMCA, EBP, is the Director of Client Experience & Education for Berg Insurance Agency in partnership with LaBarre/Oksnee and can be reached at Terri@Berginsurance.com