According to a recent poll by Reinsurance News, the main obstacles to the global adoption of parametric insurance are the lack of available data and models, along with inadequate education about these solutions.
To clarify, parametric insurance is a type of coverage that guarantees payment to a policyholder based on the occurrence of specific predefined events, such as natural disasters or other risks, regardless of the actual loss incurred.
An independent third party assesses the event’s intensity, and if the agreed-upon trigger is met, the policyholder automatically receives a predetermined payout. This approach provides immediate financial support without the need for a lengthy claims process.
The poll revealed that 39% of respondents see the lack of data and models as a major barrier to the broader use of parametric insurance.
This is a significant challenge because, without comprehensive and high-quality data, there can be a mismatch between the index and actual losses. For instance, in regions with less developed infrastructure, data may be sparse, resulting in indices that don’t accurately reflect local conditions. Additionally, historical data may not reliably predict future events due to factors such as climate change.
The absence of advanced modelling tools further complicates the accurate prediction of risks and the establishment of precise payout triggers. Furthermore, existing models can become outdated as new research and data emerge.
These challenges pose significant barriers for both insurers and policyholders, hindering the development of fair and reliable parametric products and limiting their global adoption.
The poll also revealed that 30% of respondents consider a lack of education to be a significant barrier.
This problem arises because both consumers and industry professionals often have limited understanding of how parametric insurance works and its benefits compared to traditional insurance. Without adequate education, potential policyholders may be hesitant to adopt these solutions. This gap highlights the need for targeted education and training initiatives to better explain the advantages and mechanics of parametric insurance.
Fewer respondents (22%) view basis risk as a major hindrance to the adoption of parametric insurance compared to the other issues.
Basis risk occurs when the parametric index used to trigger payouts does not perfectly align with the actual losses experienced by the insured. This mismatch can result in policyholders receiving lower payouts than expected or, in some cases, no payout at all, even if they have suffered a loss. Such discrepancies can undermine trust in parametric products, as they may be perceived as unreliable or inadequate in covering actual risks.
Only 8% of respondents believe that parametric insurance will grow without encountering major obstacles.
Overall, these results indicate that most recognise the need for further improvements to achieve widespread adoption. Addressing these issues is crucial for unlocking the full potential of parametric insurance and enhancing its role in providing swift and reliable financial protection against emerging risks.
Recent parametric insurance payouts covered by Reinsurance News include $16.8 million received by The Government of the Republic of Zimbabwe on July 5 from the African Risk Capacity (ARC) Group disaster financing mechanism. Additionally, Jamaica’s Tropical Cyclone policy with the Caribbean Catastrophe Risk Insurance Facility (CCRIF) was triggered by Cyclone Beryl on July 9, resulting in a $16.3 million payment.
