Parametric insurance is said to be significantly disrupting and complementing traditional insurance models across the climate industry, by offering innovative solutions that address the shortcomings of conventional approaches.
In the face of climate-related risks, assessing and quantifying damages accurately can be a very challenging task, but through the use of parametric insurance, which utilizes predefined, objective parameters to trigger payouts, the need for lengthy claims assessments is eliminated.
During a recent interview with Reinsurance News, Anuj Kumbhat, Co-Founder & CEO of Weather Risk Management Services (WRMS), an agriculture and climate risk management firm, explained how this move towards parametric insurance is particularly relevant in the climate industry, “where the frequency and severity of weather-related events are on the rise due to climate change.”
He said: “Parametric models allow for quicker and more efficient payouts, enabling businesses and individuals to receive funds rapidly for immediate response and recovery efforts. This is crucial in scenarios like hurricanes, droughts, or floods, where swift financial support is essential.”
Kumbhat also noted how parametric insurance complements traditional models by providing a layer of coverage for risks that may not be adequately addressed by indemnity-based policies.
“It acts as a supplementary tool rather than a replacement, offering a more comprehensive risk management strategy,” he explained.
Adding: “The use of advanced technology, such as satellite imagery and weather data, enables parametric insurance to precisely define trigger points for payouts. This data-driven approach enhances transparency and reduces the potential for disputes between insurers and policyholders.”
He also stated that parametric insurance is disrupting traditional models within the climate industry by offering faster, more transparent, data-driven solutions, with its ability to provide quicker payouts and cover risks that may be challenging to assess under indemnity-based models, which ultimately “makes it a valuable addition to the evolving landscape of climate risk management.”
Moving forward, Kumbhat also addressed how the climate industry encounters a variety of challenges, mostly driven by the rising frequency and severity of climate-related events, such as hurricanes, floods, wildfires, and droughts.
“These events result in substantial economic losses for businesses and communities. Traditional insurance models struggle to accurately assess and quantify these risks, hindering the ability to set appropriate premiums and provide timely payouts,” he said.
“Parametric insurance emerges as an effective solution to these challenges in the climate industry. Unlike traditional insurance, which relies on indemnifying actual losses, parametric insurance pays out based on predefined and measurable parameters directly linked to the occurrence of specific events. This approach facilitates faster claims processing and payouts, addressing a critical issue in the aftermath of climate-related disasters when prompt financial assistance is vital,” continued Kumbhat.
A key advantage that comes with parametric insurance, Kumbhat highlights, lies in its capability to cover risks challenging to assess using historical loss data alone.
He explains that parametric insurance relies on objective and easily verifiable parameters – including wind speed, rainfall and temperature thresholds – providing a transparent and efficient way to determine policy triggers and payouts.
As well as this, Kumbhat noted that parametric insurance can be structured to cover a broad range of climate risks, including those associated with renewable energy projects, agriculture, and coastal infrastructure.
“This flexibility positions parametric insurance as a versatile tool for businesses and governments seeking to mitigate the financial impact of climate-related events. Overall, parametric insurance stands out as a compelling solution by offering faster payouts, addressing uncertainties linked to climate change, and providing flexibility in covering a diverse array of climate risks,” he said.
