Paul Jones, head of parametric solutions for the UK and Europe at Lockton, has discussed how parametric insurance can help retailers address financial risks related to unpredictable weather patterns, supply chain disruptions, and digital transformation.
Since traditional insurance policies may not fully cover these exposures, parametric solutions offer an alternative approach to managing risk.
Jones said retailers must regularly reassess their risk management strategies to stay competitive in a changing environment. However, some risks – such as weather-driven revenue fluctuations or supply chain failures – cannot be entirely eliminated, making alternative risk transfer methods necessary.
Parametric insurance provides predetermined payouts when specific triggers – such as extreme weather conditions, supply chain delays, or non-damage business interruption events – are met. Unlike traditional coverage, parametric policies do not require physical damage or claims adjusters to determine losses. Instead, claims are settled based on independently verified data.
For instance, if a retailer’s sales are affected by excessive rainfall or an unusually warm winter, a parametric policy can trigger payments based on pre-agreed conditions. These policies can also supplement traditional insurance by filling gaps in sub-limited coverage or addressing exclusions related to non-physical damages.
Determining the appropriate trigger for a parametric policy varies by risk type. Some risks, like flooding, use clear parameters such as water depth measurements, while others require more complex, customised solutions.
Jones said the key to transparency in parametric insurance is ensuring that data sources used to activate payouts are independent of both the insured business and the insurer.
Jones outlined key features of parametric insurance that insurers and brokers could highlight when engaging with clients in the retail industry:
Since parametric solutions are customised for each business, they can be adapted to a range of industry-specific risks.
Retailers are increasingly vulnerable to supply chain interruptions caused by severe weather, labour strikes, and shipping delays. A hurricane or flood, for example, could halt production at a supplier’s facility or disrupt transportation networks, delaying inventory replenishment.
Jones said parametric insurance can help mitigate financial losses by triggering payouts when predefined shipping delays occur. Real-time data from cargo tracking systems can serve as the trigger for coverage, allowing retailers to offset additional transportation costs or revenue shortfalls caused by disrupted supply chains.
Just-in-time inventory models heighten exposure to these risks, as any delay in product deliveries can lead to stock shortages and lost sales. As climate change and geopolitical instability create more supply chain uncertainty, long-term risk management strategies will be increasingly important.
Fluctuating weather patterns can impact consumer demand, affecting sales performance in seasonal product categories. A mild winter can reduce demand for coats and boots, leaving retailers with unsold inventory that must be discounted. Similarly, extended periods of cold or wet weather in spring can negatively impact sales of outdoor furniture and gardening supplies.
By analysing historical sales and weather data, parametric insurance can be structured to trigger payouts when sales performance is impacted by abnormal weather conditions. These policies help businesses manage revenue volatility by providing compensation when key seasonal trends deviate from expectations.
Retailers in flood-prone regions can use parametric insurance to receive predetermined payouts when water levels surpass agreed thresholds. Sensors installed at insured properties monitor water depth, automatically triggering claims payments when flood conditions meet policy terms.
Coverage can be structured with different payout levels based on flood severity. A business may opt for lower indemnity limits to cover cleanup costs from minor flooding or higher payouts for more significant flood events that result in extended closures and property damage.
Following the COVID-19 pandemic, communicable disease exclusions have become standard in traditional insurance policies. However, parametric coverage remains an option for businesses seeking financial protection against future pandemic-related disruptions.
Retailers can purchase policies with triggers tied to government-imposed lockdowns or industry-mandated restrictions. These structured solutions offer financial protection against losses caused by public health events, helping businesses navigate operational disruptions.