By way of a recent legal opinion, the Colombian Superintendency of Finance (the “SFC” for its acronym in Spanish) issued its views on the regulation applicable to parametric insurance in Colombia.
Below is a summary of the most salient legal considerations:
- Definition of parametric insurance
Parametric insurance is characterized by indemnifying the beneficiary based on the occurrence of one or more pre-specified indices or parameters, as opposed to traditional insurance, which requires proof of the quantum of the loss and its occurrence:
“Unlike conventional insurance, which covers actual damage or loss levels—the indemnity being tied to losses identified by an expert damage appraiser—parametric insurance covers a predetermined level of a variable taken as an index, and payment of indemnities depends on the evolution of that variable. Such payment is made when the index reaches a specified threshold at which point damage (loss) to the insured property is deemed to begin.”
- Indemnity principle
Pursuant to Article 1088 of the Colombian Commercial Code, property-and-casualty insurance contracts are purely indemnity contracts and may not confer a profit on the insured.
Article 242 of Law 2294 of 2023 added a paragraph to Article 1088 establishing the requirements for respecting this indemnity principle in parametric insurance:
“(…) when the parametric insurance modality is used in the structuring of property-and-casualty insurance products, the indemnity principle must be respected, taking into account the technical basis for the proper correlation between the index defined as the trigger for indemnification and the damage or loss that would be caused by the claim, as provided in the second paragraph of Article 1088 of the Commercial Code.”
- Marketing
Parametric insurance was initially confined to the agricultural line of business (Law 1955 of 2019, art. 176; Decree 2458 of 2018, art. 2.12.7.2). With Law 2294 of 2023, paragraph 4 was added to Article 183 of the Financial System Organic Statute, which allows insurers to offer this type of insurance in any line of business:
“It should be noted that parametric insurance does not, per se, constitute an independent line of business but rather corresponds to a modality under which insurance products may be marketed (…)”
- Classification of parametric insurance
Parametric insurance does not create a separate line of business but is a modality that may be applied to various products; i.e., the parametric modality can be used to market any type of insurance.
Whether parametric insurance is classified as a real-property or a financial-loss policy depends on the specific relationship between the parameter and the insured interest:
“(…) in the case of damage insurance, the classification of the insurance shall be based on the insured risk that in each contract is established in a particular manner, since, from the correlation between (i) the parameter or index and (ii) the insured’s loss, it will depend whether the damage insurance falls within a real‐lineage insurance (the protection of a concrete asset) or within a patrimonial insurance (the protection of the universality of the insured’s patrimony).”
For further information, please contact our Insurance & Reinsurance team.