World Bank highlights important role of parametric insurance

The World Bank Group has underlined its role in expanding the understanding and reach of index, or parametric insurance solutions in vulnerable parts of the world by increasing efforts to build capacity, ultimately assisting the growth of the global, index insurance market.

In recent times the World Bank and other international organisations have underlined the important role insurance has to play in protecting the world’s most vulnerable against the impacts of adverse weather and climate related events.

In a recent article, produced by the World Bank, the organisation highlights the benefits and positive impact index, or parametric insurance is having in many parts of the world that are susceptible to extreme weather and climate related events.

Parametric insurance is triggered around pre-determined parameters, such as wind speed or amount of rainfall, and therefore limits the need for in-depth post-event assessment and the most advanced modelling capabilities, which means more parts of the world can be protected and that funds get to those in need much faster post-event than with more traditional insurance coverages.

The World Bank explains that in parts of the world where the reliance on agriculture is particularly high, such as parts of Asia and Africa, among other places, the development of index insurance is especially important in order to improve the sustainability and resilience of societies and economies.

“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,” explained Ceyla Pazarbasioglu, Senior Director, Finance & Markets Global Practice, World Bank Group.

Despite the understanding of the importance of index insurance and increasing awareness across many industries and locations, adoption of such insurance can be challenging.

Insurance companies, said Pazarbasioglu, can be reluctant to offer index or parametric insurance in emerging parts of the world, owing to the perception it’s difficult to assess and overall, complicated to evaluate.

Many insurers lack the needed knowledge and technical understanding to develop a sustainable and profitable parametric insurance solution for vulnerable parts of the world, continued Pazarbasioglu.

“With this challenge in mind, the World Bank Group has a role in closing the knowledge gap. Index insurance not only complements our projects, but it also elevates the insurance sector as a whole. It is our priority to help stakeholders understand and adhere to best practices that support the healthy, sustainable, and responsible development of the index insurance market,” she said.

In an effort to help the insurance sector better understand and navigate the challenges, risk modelling and product design for index solutions in emerging markets, the World Bank has announced a new guide, called the Risk Modelling Appraising Named Peril Index Insurance Product.

“These efforts to build capacity in developing countries are aimed at helping the index-insurance market grow more quickly and in a more sustainable way, because product offerings will be developed by those who best know the context and the environment,” said Pazarbasioglu.

Parametric insurance is being talked about more and more across the global insurance and reinsurance industry, and such structures are commonly utilised in the growing insurance-linked securities (ILS) space.

As the World Bank and other organisations step up their efforts and look to protect more of the world against the perils of adverse weather and climate related events, it’s likely that more index, or parametric solutions will be developed and utilised, creating an opportunity for insurers, reinsurers, and ILS players to increase their role in the space, and provide those in need with adequate and affordable protection.

Also read some of our recent coverage on parametric triggers below:

– ILS can help to narrow the flood risk protection gap: Miller, JLT Capital Markets.

– CelsiusPro launches parametric quake & cyclone emergency cash cover.

– JLT & Munich Re partner on parametric typhoon cover for Philippines.

– Philippines cat bond still planned, will expand new parametric insurance.

– ILS & parametric triggers could support forecast-based social action.

– Philippines parametric insurance pilot launched with World Bank support.

– Meteo Protect pays out on Spanish olive grower parametric covers.

– Swiss Re pioneers parametric typhoon business interruption cover.

– New Paradigm parametric deals to list on TigerRisk X-gRm platform.