Page 49 - The Insurance Times November 2025

Case Study

Parametric Insurance — A Disruptive Model for

Climate and Catastrophe Risk Management

Executive Summary Parametric insurance has emerged as a game-changing
approach. It uses objective, measurable data triggers—such
Traditional indemnity-based insurance models have long
as rainfall thresholds, wind speeds, or seismic readings—to
faced challenges in addressing the growing frequency and
severity of natural disasters. Delays in claims settlement, determine payouts. Once the predefined threshold is
data gaps, and difficulties in loss assessment often leave reached, automatic payouts are made to policyholders with-
out physical inspections or loss adjustment delays.
vulnerable populations and businesses financially exposed.
Parametric insurance, also known as index-based insurance,
offers an innovative alternative. Instead of reimbursing ac- This study examines the evolution, implementation, and
tual losses, it pays out a predefined amount when a specific outcomes of parametric insurance, using real-world ex-
parameter or trigger event (such as rainfall, wind speed, or amples from the Philippines, Kenya, and India. It provides a
earthquake magnitude) is met or exceeded. comprehensive analysis of how this model enhances resil-
ience, supports sustainable finance, and integrates with
This case study explores how parametric insurance has been national disaster risk management frameworks.
successfully implemented to mitigate disaster risks and
strengthen financial resilience, focusing on examples such Discussion – Major Problems in Conven-
as Swiss Re’s parametric cyclone cover in the Philippines, AXA tional Insurance
Climate’s drought insurance in Africa, and India’s Weather-
Based Crop Insurance Scheme (WBCIS). The conventional insurance system faces multiple challenges
in managing catastrophe and weather-related risks:
Through a detailed analysis of the concept, challenges, out- 1. Delay in Claim Settlement: Physical verification of losses
comes, and limitations, the study highlights how paramet- leads to long claim processing times.
ric insurance can bridge the protection gap for climate-ex- 2. High Administrative Costs: Damage assessment and
posed sectors—especially in agriculture, energy, and infra- documentation are expensive and slow.
structure. The findings reinforce that while parametric so-
3. Limited Access to Remote Areas: Rural and agricultural
lutions offer speed, transparency, and scalability, their suc- regions often remain uninsured due to logistical barri-
cess depends on accurate data modeling, reliable weather ers.
infrastructure, and effective regulatory support.
4. Moral Hazard and Adverse Selection: Human involve-
Introduction ment in damage verification creates potential for fraud

In the face of intensifying climate risks, the insurance indus- or misreporting.
try is under pressure to provide faster, fairer, and more scal- 5. Low Insurance Penetration: Especially in developing
able risk solutions. Traditional indemnity insurance—though economies, micro and small enterprises lack affordable,
comprehensive—has significant drawbacks when it comes timely coverage.
to catastrophic and weather-related losses. The time-con-
suming process of damage assessment, disputes over claim These issues make traditional models inefficient in respond-
amounts, and lack of coverage for low-income populations ing to climate-induced losses, where speed and reliability are
have exposed deep systemic limitations. crucial.

44 November 2025 The Insurance Times