Non-traditional insurance options that meet evolving customer needs

July 30, 2024 4:22 PM

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As our climate changes and technology advances at unprecedented rates, less traditional insurance options like parametric, micro and embedded insurance are becoming all the more common. Bringing innovative insurance models to the industry provides more tailored solutions that meet the evolving needs of individuals and businesses across insurance lines, and more coverage options may provide flexibility, accessibility and efficiency that more traditional insurance policies may fail to address.

Here are some of the more common types of non-traditional insurance options you may see more of in the near future, including the benefits and disadvantages that each unique type of coverage offers.

Parametric insurance

Parametric insurance, also known as index-based insurance, is a type of coverage that pays out a predetermined amount based on the trigger of a specific event, like an earthquake or flood, rather than on the actual losses incurred by the insured. The payout is determined by a modeled parameter, such as the magnitude or wind speed of a natural disaster, and initiated when the identified threshold is reached.

This enables a quicker response time and claims process, as the payout is more straightforward compared to traditional insurance. Relying on objective data to trigger payouts makes it less likely for claims investigation or negotiation.

There is limited coverage customization, however, with parametric insurance policies. These are often standardized, which could pose a challenge for individuals or businesses with unique risk profiles or more specific coverage needs. And because the payout is predetermined, it may not necessarily reflect the actual losses incurred by the insured.

Recently, more and more insurance carriers and insurtechs like Centinel and Otonomi are expanding coverage to include parametric insurance options.

Micro insurance

Micro insurance is a coverage option designed specifically for low-income policyholders, generally in developing nations, that offers a smaller amount of coverage for lower premiums. This type of policy is usually designed to cover a broad range of risks including injury, illness or death, and lower valued assets. Micro insurance can be triggered as parametric insurance, as well, in the event of a natural disaster or large-scale catastrophe.

Because the policy is designed for individuals or households to pay lower premiums, the coverage is also limited, and may not cover the full needs of the insured in the event of a loss.

You can learn more about how micro insurance offerings can help close the coverage gap here.

Embedded insurance

Embedded insurance is a term that refers to insurance coverage that is integrated into the purchase of a product or service, as opposed to being sold as a separate standalone insurance policy. This could be bundled with a purchase such as a smartphone or other appliance, car rental or plane tickets, and the policy may cover extended warranties, protection in case of theft, travel insurance or liability coverage.

Coverage from embedded insurance is typically offered in the transaction process and involves automated underwriting or claims processing, which provides the customer a more efficient and seamless insurance experience.

However, embedded insurance is generally standardized to fit the needs of a wider range of customers, limiting or preventing customization options. These plans may also be unclear to customers, who may not fully understand the terms and conditions of the embedded coverage they are purchasing. This can lead to misunderstandings or dissatisfaction if the coverage does not meet their needs.

Digital Insurance previously reached out to experts across the insurance industry to further define embedded insurance and provide real-world examples of the coverage.

Usage-based insurance

Usage-based insurance (UBI) is a type of insurance where the premium is based on the actual usage or behavior of the insured, rather than a flat rate or traditional underwriting criteria. It is commonly used in auto insurance, which often involves collecting data on driving habits through telematics devices or smartphone apps. This data might include mileage, driving speed, braking patterns, and even GPS location.

UBI programs often provide incentives for safer or more responsible behavior and more flexibility than some traditional insurance options. However, because premiums are determined by the policyholder's actual data, this raises concerns over privacy. With telematics, drivers may be uncomfortable with the collection of their driving behaviors and locations. Data security can also be of concern for some, as data breaches could expose consumers' personal information.

Digital Insurance covers telematics and UBI in the insurance industry extensively, with news on data analytics, new offerings and data privacy concerns.

Peer-to-peer insurance and group insurance

Peer-to-peer (P2P) insurance is a model where a group of individuals come together to pool their premiums and share the risk among themselves, providing a more community-oriented approach to insurance.

Group insurance is another model where coverage is provided to a group of individuals, typically employees of a company or an organization, under a single policy. While group insurance is generally seen in health and life insurance, Charlie Sidoti, executive director of InnSure, argued that group insurance is an untapped opportunity for climate-vulnerable or financially concerned communities to take control of their insurability.

"Just like at an employer, where an employer has a group policy for all the employees… You could do a group policy for everybody in the community. Normally when there's a disaster, they have to raise funds and distribute that to the community for relief," said Sidoti.

"Instead, we can be a lot more efficient and plan ahead by raising funds and contributions on a regular basis by purchasing a group insurance product for the community, so we don't have to go and raise funds whenever there is a disaster," he further explained. "It could be parametric or micro insurance, but it could also be traditional."

Like group insurance seen in employee benefits or health insurance, this model does have disadvantages when it comes to flexibility for the individual or household. In most cases, the plan is determined by the employer or head of the organization, which limits options and control of coverage for the policyholder.