Parametrics help bridge the protection gap

Hardly a day goes by without news of record-breaking heatwaves, wildfires, windstorms, floods or hailstorms. These events underscore the urgent need for action to lessen the growing impacts of climate change. The traditional insurance market, despite its long history of paying natural catastrophe claims, cannot absorb all of these risks by itself.

Parametric insurance offers an additional solution for buyers who need to transfer weather-related risks. These coverages, which work on triggers that pay out swiftly when a pre-determined threshold is met, are relatively new. AXA, for instance, issued its first parametric policy in 2006, in conjunction with the World Food Program, to cover droughts in Ethiopia.

Buyers’ awareness of parametric coverages began to increase a few years ago and demand for these solutions is growing. Insurers and reinsurers have established dedicated teams to construct and promote these solutions, while expanding their internal capabilities and expertise – employing scientists and data specialists, and making greater use of satellite imagery, among other things.

Greater awareness and understanding, coupled with more capacity and enhanced expertise, help make it possible to implement parametric schemes that are ever more cost-effective, precisely tailored and relevant for a broader range of clients and perils.

In Europe, we have seen clients using parametric solutions for a range of weather-based perils. For example, we designed a coverage for one client who relied upon shipping goods along a major river. The solution would pay out if the water levels fell below the level required to ensure the route was navigable.

Clients across all manner of sectors – from agriculture to construction – are asking how parametric insurance could provide additional coverage. One area where we’re currently developing alternative approaches is flooding – a significant and challenging peril worldwide.

One of the challenges with designing a parametric trigger for flooding is the availability for flood measurements to reduce basis risks and allow robust assessment of the vulnerability. Fortunately, entrepreneurial stakeholders are developing state-of-the-art technology solutions from satellite imagery to sensors which support innovative solutions.

We are also working on digital elevation models for major cities as the basis for underwriting and pricing parametric policies to cover particularly flood-prone areas. The principle is simple: if an area records water levels above a certain predetermined measurement, the beneficiary receives a pay-out. The programmes will also draw extensively on satellite data, both in developing models and in determining when water levels exceed the threshold values.

We are all in the fight against climate change together, and I believe that we will see even greater collaboration between insurers, private companies, data providers and local/regional governments to find ways to manage and transfer the risks of climate change in innovative ways.