Parametric Flood Insurance: Parametric flood insurance, in general, protects against an event. It’s a trigger when that event happens, you get a claim payout immediately. That payout is based on a specific, measurable event. For example, maybe you have three feet of flood damage. If you take out a parametric flood insurance policy for $50,000 against three feet of flood damage, that exact amount is paid out as soon as the event occurs. It’s paid based on the event not on the extent of the damage.
Parametric flood insurance has been around since the 1990s, but it’s really starting to make a push in the U.S. as companies and technology catch up. Traditionally, it was hard to offer parametric flood insurance because there wasn’t enough data. Flooding is often measured using gauges, and if there aren’t enough gauges, or they’re not in the right places, the data isn’t accurate enough to use. Some of the benefits of parametric flood insurance are faster payouts. With traditional flood insurance, it’s not uncommon for a claim to take 90 days to pay. However, with parametric insurance, in many cases, a check can be sent to the insured within 48 to 72 hours.
Parametric Flood Insurance
Floods cause tens of millions of dollars in damage around the world every year, much of which isn’t covered by traditional insurance. It’s a risk that many insurers have struggled to protect against but parametric insurance offers a way to close that gap. At its core, parametric insurance puts cash into the hands of people who’ve suffered a loss incredibly quickly. Earlier this year, for example, we were able to pay a flood-affected customer directly into their bank account in less than 10 hours after a disaster.
This type of insurance has several major benefits. The first is speed, claims can be settled far faster than with traditional policies. Second, it’s transparent. The payout is triggered simply by a measurable event, such as a specific water depth being reached. That makes it easy for customers to understand exactly when and why they’ll be paid. Finally, it’s flexible, the cash payment can be used however the recipient needs, whether that’s repairs, replacing equipment, or covering other urgent expenses.
One well-known example of parametric cover in action came in the aftermath of Hurricane Sandy, when the New York Transport Authority which operates subway tunnels and tracks received a $200 million payout under such a policy. This was in a market where they had previously struggled to secure traditional flood insurance. While this kind of coverage has existed for years typically purchased between insurers or by governments. it hasn’t been available to the broader public. Our goal was to use technology to make it accessible to everyone who needs it. Two key technology shifts have made this possible. First, the rapid drop in cost and rapid scalability of IoT (Internet of Things) devices. Second, huge advances in computing power, giving us the ability to process complex flood modeling data in ways that simply weren’t possible a decade ago.
How Parametric Flood Insurance Works?
Here’s how it works: when a customer buys a policy, they choose two things, the trigger water depth and the payout amount. Company provides a price, and once they’ve purchased the policy, they will install a sensor outside their property. If flooding occurs, the sensor records the data and sends it to the functional team. After instant validation, the company releases the payment as quickly as possible.
How to Purchase Flood Insurance the Right Way?
Step 1: Reach out to an insurance agent. This could be a local agent or even a national 1-800 number. When you do, there are a couple of important questions to ask. First: Do you write flood insurance policies through both the National Flood Insurance Program (NFIP) and private companies? This matters because if they only work with one option, it could end up costing you thousands of dollars.
Step 2: If available in your area, get at least three different quotes from private flood insurance companies. Not all private insurers calculate rates the same way as the NFIP, and you might find better coverage or pricing.
Step 3: Compare the coverages. Private flood insurance often offers options that NFIP does not. For example, the NFIP maxes out at $250,000 for a home, which may not fully replace a house like the one behind me. A private insurer might be able to offer full replacement cost.
Step 4: Look at the deductibles. Flood insurance deductibles work differently than a standard homeowners’ policy. You may have separate deductibles for the building, for contents, and if included in a private policy for additional living expenses. These can add up, so review them carefully.
Step 5: Once you’ve selected your policy, complete the application, make your payment, and submit it to your insurance agent.
Step 6: Ask about the waiting period. If this policy is for a new home purchase, there’s usually no wait period. But if you’re buying flood insurance to protect an existing property, or at renewal, there may be a wait period (NFIP policies, for example, have a 30-day wait). You don’t want a gap in coverage that might cause problems with your mortgage company.
How Much Does Flood Insurance Cost?
Now, let’s talk pricing especially for a house in a flood zone. How is flood insurance pricing determined? There are many factors. In the past, flood zones used to be the biggest driver of pricing, but that’s changing. Today, things like the replacement cost of your home, the actual cost to rebuild it if it were completely destroyed plays a big role. Other factors include how often flooding happens in your area, the type of flooding (whether it’s river flooding, flash flooding, or coastal flooding), and the elevation of your property compared to the “base flood elevation.” That’s the level the federal government uses to estimate how high floodwaters might rise. All of these factors are combined to determine your flood insurance rate.
The federal government and private flood insurance companies use these elements, but private insurers have more flexibility in how they price risk. That’s why you might get quotes ranging from $400 from one private company to $4,000 from another, depending on the level of risk they’re willing to cover. So, what kind of pricing should you expect? The national average for residential flood insurance in 2024 is about $1,000 per year for roughly $250,000 in coverage. Keep in mind that $250,000 might not be enough to fully cover your home, and it’s actually the maximum coverage the government’s program offers for residential buildings. You might have heard a lot about flood zones, but the federal government isn’t relying on those as much anymore. However, some private companies still do, so don’t get too focused on your flood zone. What might actually have a bigger impact on your premium is something called a flood risk score.
Does flood insurance cover burst pipes?
Parametric Flood insurance does not cover damage from burst pipes. Instead, such damage is usually covered under homeowners’ insurance policies, as burst pipes are considered a plumbing issue and not a flooding event caused by external water sources like rivers, heavy rain, or storm surges. Flood insurance is designed to cover losses resulting specifically from natural disasters, where water comes from outside the home and affects at least two properties or two acres of land