The range and nature of risks is ever growing and evolving worldwide. Individuals, businesses and communities are having to deal with issues like globalisation, rapid urbanisation, technological evolution, population growth and climate change.
This changing risk landscape is throwing new challenges at the insurance industry, which is having to develop new ways to mitigate risk and address the insurance protection gap that exists in the developed and developing world. One method growing in popularity is the use of parametric insurance.
Global law firm Clyde & Co has launched a report called Building a resilient world: How parametric insurance can help close the protection gap, which looks at the growth of parametric insurance and considers the important role it has to play in building resilience to natural catastrophes.
“Parametric insurance products are developing rapidly at local, regional and national level as they provide an elegant solution for risk-transfer concerns, often for populations that were previously uninsured and for whom the protection gap has traditionally been widest,” said Nigel Brook, partner, Clyde & Co. “That is why they are gaining so much attention, particularly following a year where the threat from natural disasters has been writ so large.”
The insurance protection gap means that in middle or low-income countries the uninsured proportion of catastrophic losses often exceeds 90%. Meanwhile, the Bank of International Settlements calculates that, especially in developing markets, the worst natural catastrophes can in some cases permanently reduce a country’s GDP by almost 2%.
In 2017, economic losses caused by natural catastrophes looked set to top US$300 billion (according to
Swiss Re data) compared to an average of US$178 billion for the previous 10 years. Parametric insurance can “play a key part in closing the protection gap” and mitigating some of those losses, according to Brook.
The Clyde & Co report explores the benefits of parametric insurance – which centre on speed, certainty and the ability to plan ahead – and how such products have been used so far. It looks at some of the legal and regulatory challenges that have already or may be faced in the future, and how these have been and can be mitigated. It also explores the question of basis risk; the concept of insurable interest; and the indemnity principle, which means that, in theory, in certain jurisdictions, losses must be valued or assessed before claims can be paid.
The report contends that the way parametric products are treated in the law and by regulators will evolve and become clearer as case law and precedent develops. But it suggests that with the level of support currently being given by governments around the world, together with demand from buyers and the proven success of parametric insurance products to date, regulators and law makers are expected to support and encourage the responsible roll-out of parametric insurance rather than attempt to hold it back.
“With continued support and increased understanding, parametric insurance can fulfil its vast potential and, alongside traditional insurance and other novel forms of risk transfer, play a key part in closing the protection gap,” Brook added.
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