If you’re riled up about rising insurance costs in Florida or California, spare a thought for earthquake survivors in Turkey or flood victims in Pakistan. Most homeowners in the developing world can’t buy natural-catastrophe insurance—“natcat” in industry lingo—at any price, even as climate change makes calamities more frequent and severe.
The World Bank, United Nations, and others funnel substantial relief to less fortunate disaster areas—$71 billion worth in 2021, according to the Centre for Disaster Protection. But nearly all of that is “money they find in the back of the sofa,” as Centre director Daniel Clarke puts it—distributed ad hoc, frequently amid costly delays and political rancor.
There is a better way, he says, involving an innovation called parametric insurance. Conventional indemnity policies, as we all know, depend on after-the-fact, often drawn-out, and contentious assessments of damage.
Parametric policies pay a set amount automatically if certain mutually agreed triggers are reached—tremor strength in an earthquake zone, say, or wind speed or tidal surge in a flood plain. “Despite climate change, most of the risks are still modelable,” Clarke comments.
The honed-down structure makes parametric settlements quicker and, in theory, cheaper, sidelining the familiar army of adjusters and attorneys. The speed is attractive to governments that need quick cash for disaster relief. The economy is increasingly interesting to insurers and reinsurers struggling with swelling natcat losses around the world.
“We are conveying the message that this is a growing and profitable line of business,” says Antoine Bavandi, head of climate resilience solutions at reinsurance broker Gallagher Re.
Payouts from parametric policies increased 15-fold from 2017 to 2021, though to a still-puny $1.9 billion, the Centre for Disaster Protection reports.
The emerging field has found a poster child in Morocco, which this September sustained its worst earthquake in 60 years, a 6.8-level tremor in the Marrakesh region. Gallagher Re had organized a $275 million parametric policy with a trigger of 5.0, which paid out within three weeks, says Bavandi.
That covered at most 15% of the catastrophe’s ultimate cost, he estimates. But it funneled “emergency response to the most poor and vulnerable that prevented all sorts of snowballing effects on their livelihoods.”
Parametric sovereign insurance is slowly catching on in the Byzantine, intersecting worlds of official donors and global climate diplomacy. Germany and the United Kingdom got the ball rolling five years ago, earmarking a sliver of their foreign aid for disaster insurance premiums, Bavandi says.
The “loss and damage” fund for poor, climate-afflicted countries that was agreed upon at last year’s COP 27 environmental summit includes up to $400 million for insurance premiums, he adds. COP 28, which kicks off on Nov. 30 in Dubai, may add more largess.
No one will rush to go all-parametric on the insurance for their beach house or wooded retreat. For insurers, a policy trigger could be reached without actual damage, leading to a windfall for the policyholder. Insureds need to worry about the opposite: damages outside the pre-agreed triggers, which would go unpaid.
As in Morocco’s case, though, parametric could be useful as part of the coverage for an entity with large, complex insurance needs, even in the highly developed U.S. market.
“Parametric could fill in some of the gaps in traditional indemnity insurance,” says Andrew Provines, a New Jersey–based actuary with industry consultant Millman. “It’s one of the hot topics in that space.”