Index-based, or parametric structured insurance solutions, while beneficial and expanding across the world, require greater supervision, according to Lead Insurance Specialist at the World Bank, Craig Thorburn.
Insurance industry supervisors, policymakers and insurers from the Asia Pacific region met in Singapore at the 9th Consultative Forum in March, 2017, and debated the challenges of and potential for insurance to protect smallholder farmers against the impacts of natural disasters and climate risks.
During the event industry experts underlined the benefits of index-based, or parametric agricultural insurance, stating that by sharing the risk with the industry, agricultural insurance enables better risk management. Furthermore, when conducted at the sovereign level it supports better government finances, panelists explained.
However, while parametric structured solutions (which is a common and attractive feature of the insurance-linked securities (ILS) community) enable insurance and reinsurance capital to reach vulnerable, poorer parts of the world and also facilitate rapid-payout post-event, owing to the trigger being linked to pre-defined parameters, such as hurricane intensity, supervision is needed, heard event attendees.
This is according to Craig Thorburn of the World Bank, who asked; “Is index insurance actually insurance, or a derivative? How should insurable interest be defined? How should pilot projects be supervised in a proportionate manner, particularly while encouraging innovation?”
He raises an interesting point. Parametric, or index-based insurance solutions aren’t always structured around a traditional insurance contract, which means they aren’t always covered by the same legislation and regulatory oversight as say, indemnity structured products.
Although it’s relatively common for index-based solutions to be made into a more traditional insurance product, by including an element of indemnity protection as well, this isn’t necessary, and in the cases where the product is a pure derivative or swap, then supervision, regulatory oversight and acceptance would be beneficial.
Hannah Grant, Head of Secretariat of the Access to Insurance Initiative (A2ii), speaking at the Forum, said; “Coordinated action by all stakeholders – insurance supervisors, policymakers, industry practitioners – should continue in order to address the challenges of successfully implementing and scaling up agricultural insurance for smallholder farmers, and to ensure it delivers client value.”
When compared to traditional insurance, index-based protection can be far more complex to understand by its nature, and while organisations such as the African Risk Capacity (ARC) facilitate the expansion of agricultural index-based insurance to those in need, here and in Asia there’s still minimal actual framework for approving these types of solutions, advised Agrotosh Mookerjee, Risk Shield Consultants.
“Policymakers, insurers, and regulators should sit together to develop new strategies and index-based insurance solutions,” said Dr. Yoshihiro Kawai, Secretary General of the International Association of Insurance Supervisors (IAIS). Who continued to explain that the IAIS is “currently drafting new supervisory guidance on index-based insurance to contribute to this important dialogue.”
Adequate supervision and legislation around parametric type solutions, along with governments increasing their understanding of the benefits and limitations of such solutions, will help to improve confidence and comfort with this type of product.
In turn, greater standardisation and understanding should help to expand index-based agricultural insurance, meaning that more of the world’s most vulnerable and poorest have access to much-needed protection against natural disasters and climate events.