Parametric insurance is a non-traditional insurance mechanism designed to provide rapid payouts based on pre-defined triggers (parameters). The trigger for a payout can be based on natural hazard parameters such as tropical cyclone wind speed, magnitude of an earthquake, or rainfall measurements etc. Alternatively, the trigger can be based on a “modelled loss”, which is an estimate of the financial loss from a disaster according to a catastrophe model.
As the triggers are pre-agreed, the amount of financing that would be provided to policyholders is determined well before a natural hazard event occurs. Parametric insurance thereby helps to “pre-arrange” finance, which can reliably be accessed in the case of a qualifying event.
Designing the triggers used in the policies offered by PCRIC requires several steps of research. These steps include developing an understanding of natural hazard risk, estimating the intensity of historical events and possible future scenarios, their associated impacts, and the relevant response measures and associated costs. Client input and feedback is critical to ensure that the parametric insurance design is closely aligned with country conditions, experiences, and objectives with regards to financial response capacity.
Challenges with designing parametric insurance policies
The implementation of parametric insurance in the Pacific region has encountered several challenges over the past decade. Insurance markets are relatively under-developed or non-existent, there is a general lack of awareness of what parametric insurance is and its advantages and limitations, there is a lack of technical capacity in the region to structure and price parametric products (actuarial and catastrophe modelling skills), and a lack of data to model disaster risk accurately. PCRIC aims to address these issues through both the provision of technical capacity building and through offering a suite of products which meet client needs and which are technically robust, transparent, and simple to understand.