Parametric Insurance Fights Climate Change
Climate change poses significant challenges for the insurance industry, and parametric insurance is being explored as a potential solution. According to Ben Qin, head of North Asia and Australia for Descartes underwriting, parametric insurance offers a means to an end in dealing with difficult-to-model perils such as climate change.
Parametric insurance contracts are defined based on a predefined event outcome, as opposed to traditional insurance, which is based on a post-loss outcome. This approach allows for a more tailored and flexible coverage, taking into account the specific risk profile and risk appetite of the insured.
How Parametric Insurance Works
Ben Qin explained that parametric contracts are based on a predefined event and a predefined amount subject to that event. This approach enables the insured to know exactly what they are covered for and what the loss settlement amount will be in the event of a claim.
In contrast, traditional insurance models often rely on a broad brush approach, where everyone in a particular area is charged the same premium, regardless of their specific risk profile. Parametric insurance, on the other hand, offers a more detailed approach, considering the specific circumstances of each insured.
Building Resilience Against Climate Risks
Parametric insurance can help build resilience against climate risks by providing a more tailored and flexible coverage. By addressing gaps where traditional insurance has left capacity or challenges on the table, parametric insurance can offer a more sustainable approach to risk management.
For example, Descartes underwriting launched a parametric frost offering in 2022 in Australia, which was developed for French vineyards.
Challenges and Opportunities
While parametric insurance offers many benefits, there are also challenges to its development and implementation. One of the main challenges is adapting parametric insurance products developed in one region to another region with different climate and weather patterns.
However, Ben Qin noted that the Bureau of Meteorology provides a reliable source of weather data, which can be used to inform parametric insurance contracts. By attaching parametric payouts to weather forecasts or flood gauges, insurers can provide a more accurate and reliable coverage, particularly for insurance products that require precise data.
Parametric insurance is becoming increasingly popular in Australia, particularly for perils such as cyclones, bushfires, and floods. As traditional insurers withdraw from these markets due to capacity or coverage issues, parametric insurance is emerging as a viable alternative.
While parametric insurance is still largely focused on single named perils, there is potential for it to be packaged with other perils to provide a more extensive coverage. As the insurance industry continues to evolve in response to climate change, parametric insurance is likely to play an increasingly important role in helping businesses and individuals manage their risk, similar to the stable legacy market options.
Ben Qin noted that the key to successful parametric insurance is education and awareness. By understanding the specific risk profile and risk appetite of each insured, parametric insurance can provide a more tailored and sustainable approach to risk management.
