The World Bank Group has highlighted the benefits of parametric insurance, also known as index insurance, in many parts of the world that are vulnerable to extreme weather and climate-related catastrophes.
Parametric insurance pays out based on a pre-determined index (such as storm warning signals or rainfall levels) for damage caused by natural catastrophes. This is unlike traditional insurance, where insurers have to survey the actual property for damage. It is said to allow a quicker and more objective claims settlement process, which, according to the World Bank Group, has huge potential in improving risk management and helping alleviate poverty.
The article’s author, Ceyla Pazarbasioglu, senior director of the finance & markets global practice for the World Bank Group, explained: “Through the Global Index Insurance Facility (GIIF), the World Bank Group is fully committed to the development of local capacity to create, evaluate, price, and distribute index insurance products to help the vulnerable build resilience against natural disasters, climate risks, and food insecurity.”
However, the article also highlighted several challenges to the development of parametric insurance, especially in the emerging markets of Asia and Africa.
“Index insurance is rarely offered by insurers in developing countries, because it is perceived to be a difficult and complicated product to evaluate,” Pazarbasioglu said. “Most insurers still lack the knowledge and technical capacity to develop sustainable and profitable index insurance products.”
The World Bank Group is aiming to close the knowledge gap by releasing a practical guide, titled:
Risk Modeling for Appraising Named Peril Index Insurance Products: A Guide for Practitioners. The guide aims to help the insurance industry learn more about the complex processes of management decision-making, risk modelling, and product design for parametric insurance.
“Better-designed index insurance will better protect the poor and the vulnerable against the challenges posed by natural disasters and climate risks,” Pazarbasioglu concluded.
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