Parametric insurance solutions - is it a legally viable option as the midpoint between traditional insurance and index-based derivatives from a South African perspective?

Abstract

Parametric (or index-based) insurance solutions has been introduced in many emerging countries to combat certain severe weather-related risks, as an alternative to traditional indemnity based short-term insurance.

With the introduction of the new Insurance Act, 2017 that introduced a drastic shift in the way insurance policies are to be categorized in South Africa, it is still to be determined whether the new regulatory regime is flexible enough to cater for parametric insurance solutions given the nature and the construct of these solutions.

Due to the nature of how the ‘’loss” is calculated, a critical question to be answered is whether these products are indeed products that can be classified as ‘indemnity insurance’ and whether it fits within the current insurance regulatory framework, where the definition of a “non-life insurance policy” requires the full or partial indemnification of a loss before a claim can be made. This paper will aim to define what exactly parametric insurance is. It will aim to clearly distinguish between weather based derivatives based on indexes and parametric insurance solutions and also aim to distinguish parametric insurance from traditional indemnity insurance.