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Parametric insurance grows due to climate change

Parametric insurance
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Ground Report | New Delhi: Parametric insurance; Increasingly frequent extreme weather events can affect electricity grids, the urban water supply, and sanitation cycle, gas pipelines, and other key infrastructures that highlight the vulnerability of cities and regions to climate change. Natural disasters, mainly those related to hydrometeorology, put both developed and developing countries to the test, but especially places that have not invested enough in improving and strengthening infrastructure.

Parametric insurance

Natural disasters around the world caused  $ 268 billion in economic losses in 2020. Insurance covered only a small fraction of this figure. Estimates of insured losses from major natural catastrophes in 2020  were approximately $ 78 billion. As economic losses from catastrophes grow faster than insured losses, adapting economies to climate-related shocks has become one of society’s top priorities.

Reinsurer Swiss Re has estimated the global protection gap in 2020 to be $ 113 billion, reinforcing the significant level of uninsured losses that occur from catastrophic events.

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Industries most at risk

Extreme weather can affect many industries, generating volatile revenues, higher costs, disappointing profits, or even insolvency and bankruptcy. Industries with high risks, according to the Swiss Re report, related to climate include:

farming

Cold waves, heat waves, floods, hail, and forest fires can destroy crops. Approximately  75% of world agricultural production is uninsured, despite the fact that climate risk is associated with almost 60% of yield variability and is, therefore, a crucial factor in influencing food production and production. farmers’ income.

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Building

Construction projects face a variety of weather risks, such as hurricanes, thunderstorms, extreme rains, tornadoes, and heat or cold waves. Significant delays can lead to serious financial loss, even if the project itself is not physically damaged.

Tourism

The tourism industry is particularly sensitive to hurricanes, floods, and tornadoes. The impact of a storm can last for months and even years longer than the meteorological event. The report gives as an example the case of Puerto Rico, where tourism represents 6.5% of its economy. The territory registered a record 8.1 million visitors in 2016. Hurricane Maria struck in October 2017 and devastated the island. In 2019, the number of tourists visiting the island was still  36% below 2016 levels. For those with insurance, property policies were slow to respond and claims often took years to resolve.

Renewable energy

With the significant shift from energy production to wind, solar and hydro, climate risks have become a critical factor. Renewable energy production can be substantially affected by immediate events such as hurricanes, hail, droughts, floods, or long-term events such as the degradation of wind patterns. There is also the risk of prolonged periods of insufficient wind or solar resources.

Image: Swiss Re Institute

Faced with the increasingly frequent extreme weather events, the product that has grown the most in the insurance sector is parametric insurance. Originally created as a form of catastrophe insurance, parametric insurance is finding additional uses to protect against extreme weather, other natural disaster risks, cyber risk, and terrorism.

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Instead of paying a claim based on the value of an incurred loss, parametric insurance pays a predetermined value when a triggering event occurs, and the payment value typically increases as the intensity of the event increases. In the case of catastrophes such as extreme weather events, typical parameters can include wind speed, temperature, precipitation, hail size, wildfire burning area, or even delays related to transportation or production. Tourism industry indices such as revenue per available room, revenue per passenger kilometer, or simply passenger arrival can also be used when correlated with multiple trigger events.

According to experts, parametric insurance is suitable for developing economies. As no costly visits are required to assess losses (country Meteorological Agency data or satellite data can be used), payments can be made quickly to hard-to-reach policyholders in remote locations.

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