The Insurance Institute of Gauteng, in partnership with Swiss RE, hosted a successful in-person session on the 17th of July. With record attendance, our President, Bukhosi Khumalo welcomed all attendees and set the tone for the session.
The first speaker, Priyen Mehta, Head of P&C Southern Africa at Swiss RE, started his presentation by providing an overview of parametric insurance. He explained that parametric insurance, also known as index insurance, is a type of insurance cover where the payout is triggered by the occurrence of a pre-defined event. The payout is measured by an agreed-upon index and not the actual loss.
These payouts are triggered by events requiring immediate payment, such as natural disasters, like, earthquakes or floods, measured by sources such as the weather services.
Traditional insurance coverage requires a claims adjustment process, whereas parametric insurance, eliminates the need for this. This index must be independent, measurable, transparent, and quickly reported. A highlight from Priyen is that the difference between the actual loss and the index-triggered payout is referred to as the basis risk, minimising this risk through design must be carefully considered. To ensure effectiveness and trustworthiness, it is important to obtain regulatory approval and carefully structure the process.
Our next speakers, Nicole Britton, Legal Director, and Ernie van der Vyver, Partner at Clyde & Co, provided some legal perspectives on Parametric insurance.
Nicole further mentions that parametric insurance contracts are not “explicitly” classified as insurance under South African law. In addition, the Insurance Act states that indemnification is only considered for a non-life insurance policy contract if there must be evidence that an actual loss was suffered due to an unforeseen event and if insurable interest was present at the time of the loss.
Parametric insurance will only pay based on the occurrence of a predefined event, without requiring proof of actual loss or insurable interest, this may not meet the legal requirement and definition of insurance in South Africa. The challenge is that these products could be regulated as various products and insurers need to be cautious and should seek approval from the Prudential Authority to prevent any Insurance Act breaches. The interim approach is for the Prudential Authority to communicate with the South African Insurance Association (SAIA).
The session was insightful, Priyen Mehta outlined the benefits of parametric insurance, emphasizing its quick payouts for events like natural disasters. Nicole Britton and Ernie van der Vyver added that, under South African law, parametric insurance may not qualify as traditional insurance due to the lack of actual loss or insurable interest, posing regulatory challenges. Insurers must seek Prudential Authority approval to ensure compliance and avoid breaches of the Insurance Act.
Article written by Deidre’ Henneberry | IIG – Education
