The future of parametric insurance: innovation, climate change and capacity building

Published: Mon 21 Oct 2024

Liberty Mutual Reinsurance's Eve Dartigues on how parametric solutions are playing an increasingly prominent role in managing catastrophe risks.

The future of parametric insurance: innovation, climate change and capacity building

Climate-related risks are straining the capabilities of traditional reinsurance solutions. Catastrophes are growing in both severity and frequency, leaving traditional models under pressure.

Parametric insurance offers fast payouts and transparent, scalable protection. With technology reducing basis risk and improving the accuracy of triggers, parametric insurance provides coverage across both developed and emerging markets.

Catastrophe losses and the urgency of parametric solutions

In 2023, global economic losses from natural catastrophes reached an estimated $380bn, with only around 31 percent covered by insurance. This protection gap highlights the real-world challenges facing traditional indemnity-based insurance. Uninsured losses, particularly in emerging markets, are creating economic vulnerabilities that demand new models of risk transfer.

Parametric insurance offers a means of addressing this shortfall. While traditional policies can take months to settle claims, parametric payouts can be deployed within days and allow for rapid liquidity.

The role of co-reinsurance

As the need for large-scale risk solutions grows, so does the importance of co-reinsurance. Where reinsurers have traditionally competed for business, the increasing scale of climate risk demands a more collaborative approach.

Liberty Mutual Reinsurance (LM Re) has been at the forefront of developing best-in-class co-reinsured parametric products which help spread risk across multiple participants. By taking on the role of product structurer, LM Re can lead the deployment of larger parametric programs. These solutions open the door for collaboration with smaller insurers who may not have had access to parametric products.

Bridging the gap

The demand for agile, scalable reinsurance solutions is growing. Traditional indemnity insurance remains essential but is increasingly challenged by complex climate-related disasters. Parametric insurance serves as a complement to traditional (re)insurance, bridging the gap between immediate financial needs and longer-term claims processes.

This is particularly pertinent within microinsurance markets, where traditional products may not fully address the niche, localised risks communities face. With technological advancements – satellite data, remote sensing and real-time monitoring – parametric policies are becoming more precise and reliable.

One example is LM Re’s collaboration with Sprout and Britam, introducing a parametric solution to protect Kenyan coffee farmers by using satellite data to monitor rainfall. When trigger levels are met, farmers receive payouts compensating for reduced coffee yields.

This year, LM Re partnered exclusively with Safehub to introduce a sensor-based parametric earthquake insurance product. LM Re and Safehub have since partnered with the University of California (UC) to protect their campuses from the risk of potential earthquake damage. Under this policy, claims are triggered and settled based on measurements from 180 Safehub sensors installed across multiple UC locations.

Looking ahead

As climate change intensifies, the role of parametric insurance in managing catastrophe risks will only increase in prominence. With global economic losses from disasters on the rise, parametric solutions are increasingly recognised as essential tools for bridging the protection gap. Through continued innovation in co-reinsurance models, micro-insurance programs and large-scale parametric offerings, LM Re is leading the way in providing fast, reliable and scalable solutions that help businesses and communities adapt to an unpredictable future.

Eve Dartigues, senior underwriter, agriculture & parametrics, Liberty Mutual Reinsurance

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