Published on
10 September 2024Reading time
7 min.
Climate-related risks are increasingly straining the capabilities of traditional reinsurance solutions. Catastrophes like hurricanes, wildfires, hail and floods are growing in both severity and frequency, leaving traditional models under pressure. Parametric insurance stands out as a vital tool to help close the protection gap for hard-to-insure risks and the more esoteric risks and exposures.
Parametric insurance offers fast pay-outs, and transparent, scalable protection. With technology reducing basis risk and improving the accuracy of triggers, parametric insurance can provide coverage across both developed and emerging markets, particularly in areas vulnerable to severe weather-related events and disasters.
Catastrophe losses and the urgency of parametric solutions
In 2023, global economic losses from natural catastrophes reached an estimated $380 billion, with only around 31% covered by insurance[1]. This protection gap highlights the real-world challenges facing traditional indemnity-based insurance, which can struggle to provide timely relief in the wake of natural disasters; 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. By paying out based on a set of pre-defined triggers such as wind speeds, or earthquake magnitudes, parametric products allow for rapid liquidity following catastrophe events. In contrast to traditional policies, which can take months to settle claims, parametric payouts can be deployed within days, offering businesses and communities almost-immediate relief.
The role of co-reinsurance
As the need for large-scale risk solutions grows, so does the importance of co-reinsurance – where multiple reinsurers collaborate to provide capacity for large programmes. Where reinsurers have traditionally competed for business, the increasing scale of climate risk demands a more collaborative approach, sometimes in the form of cooperative models.
Co-reinsurance enables reinsurers to collectively share risk while ensuring that the needs of clients are met quickly and effectively. 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 programmes that would be difficult for a single reinsurer to underwrite alone.
Importantly, these solutions open the door for collaboration with smaller insurers who may not have previously had access to parametric products. By expanding awareness and offering scalable solutions, reinsurers can ensure that their parametric expertise reaches a broader audience, helping to build resilience in sectors and developing economies that would otherwise remain exposed to natural catastrophes.
Bridging the gap
As climate change accelerates, the demand for agile, scalable reinsurance solutions is growing. Traditional indemnity insurance remains essential; but is increasingly challenged by the complexity and scale of climate-related disasters. Parametric insurance serves as a complement to traditional (re)insurance. It provides rapid payouts, bridges the gap between immediate financial needs and the longer-term claims process, and can be easily deployed for different perils and diverse geographic regions.
This is particularly pertinent within micro-insurance markets, where traditional products may not fully address the niche, localised risks that small businesses, farmers, and wider communities face. With technological advancements – such as satellite data, remote sensing, and real-time monitoring – these policies are becoming more precise and reliable, minimising basis risk and ensuring faster responses.
A recent example is LM Re’s collaboration with Sprout and Britam, introducing a parametric solution to protect Kenyan coffee farmers from climate risks. This partnership uses satellite data to monitor rainfall, and when trigger levels are met, farmers receive payouts to compensate for reduced coffee yields. This approach addresses the specific challenges that smallholder farmers face, providing them with immediate financial relief. By complementing traditional (re)insurance models, parametric products like this are helping build resilience in vulnerable regions and industry sectors.
This year, LM Re partnered exclusively with Safehub to introduce a sensor-based parametric earthquake insurance product. This has allowed clients to access building-specific data, leading to more precise reinsurance payouts. It’s important to think about how we can constantly innovate to streamline the claims process whilst building resilience for businesses and communities against catastrophic events.
Looking ahead
As climate change intensifies, the role of parametric insurance in managing catastrophe risks will only grow more prominent. 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.
