Parametric insurance fights climate risks
Parametric insurance is being explored as a means to combat climate risks, with companies like Descartes underwriting at the forefront. Ben Qin, head of North Asia and Australia for Descartes underwriting, notes that parametric insurance offers a unique approach to dealing with difficult-to-model perils like climate change.
According to Qin, parametric insurance contracts are defined by a predefined event outcome, as opposed to traditional insurance, which is based on a post-loss outcome. This approach allows for more tailored and flexible coverage, taking into account specific premises, assets, and risk profiles.
Parametric Insurance and Climate Risks
Qin believes that parametric insurance can help build resilience against climate risks by plugging gaps in traditional insurance coverage. By offering predefined event and amount contracts, parametric insurance can provide highly tailored coverage for specific risks, such as frost, floods, and cyclones.
For example, Descartes underwriting launched a parametric frost offering in Australia in 2022, which was initially developed for French vineyards. This product takes into account individual farm and paddock-level factors, such as temperature profiles and wind patterns, to provide more accurate and targeted coverage.
Challenges and Opportunities
Qin notes that there are challenges in developing parametric insurance products for different regions, but the core issues remain the same. The use of data from organizations like the Bureau of Meteorology (BOM) can help provide independent and reliable information for underwriting purposes.
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Parametric insurance offerings are becoming increasingly popular in Australia, particularly for perils like cyclones, bushfires, and floods. Qin believes that parametric insurance can provide a good alternative to traditional coverage, especially where capacity or coverage issues exist.
Businesses in Australia are starting to take advantage of parametric offerings to protect themselves against multiple threats, including floods, cyclones, and fires. While parametric insurance typically focuses on single named perils, it is possible to package multiple perils into one insurance contract.
Parametric Payout Mechanics
The mechanics behind parametric payouts involve attaching the payout to a specific metric, such as a BOM weather forecast or a flood gauge reading. This approach provides a clear and transparent benchmark for determining payouts, making it easier for clients and insurers to understand.
By using data from organizations like the BOM, parametric insurance can provide more accurate and targeted coverage for specific risks. This approach can help create a more sustainable and resilient insurance market, particularly in the face of increasing climate risks.
As the insurance industry continues to evolve, parametric insurance is likely to play a growing role in combating climate risks. With its unique approach to coverage and its ability to provide highly tailored and flexible protection, parametric insurance is an important tool for businesses and individuals looking to manage their risk in a changing climate.