Thursday, December 1, 2022
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“Parametric insurance offers coverage solutions for risks that would otherwise be difficult to cover”

MGaffers, pandemics and other new risks are expected to occur more frequently in the coming decades. Climate change and the growing interdependence of human activities promote the occurrence of events with potentially catastrophic human, economic and environmental consequences.

The reinsurance company SwissRe estimates, for example, the increase in losses from natural disasters worldwide to between 5% and 7% per year. If epidemiologists had identified the plausibility of a “new emergence of a strain of influenza virus with pandemic potential during the 21e century” (Antoine Flahaut, “Epidemiology of influenza pandemics”, Review of respiratory diseases no. 25/4, 2008), the insurance sector, like many other economic and political actors, was unable to prepare for the Covid-19 pandemic.

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According to Florence Lustman, current president of France Assureurs, operating losses related to the pandemic represented more than 300 times the amount of insurance premiums paid by policyholders in 2020. A sign of the difficulty in organizing the pooling of risks, disasters at a reasonable price, the abandonment of the plan to create a pandemic insurance scheme in France was approved at the end of 2020.

The benefits of insurance “parametric”

Faced with the intensification of catastrophic risks, the insurance sector nevertheless intends to continue playing the role of pooling the risks assigned to it. “Parametric” insurance is therefore a relevant tool to increase the availability of insurance at a reasonable price. The compensation provided by a parametric contract depends on the value of an index constructed to estimate the size of the insured losses.

For a farmer, for example, a parametric index might combine rainfall, temperature and soil moisture data to calculate possible production losses. Satellite data can also be used to measure the quality of plant cover and thus roughly estimate forage production.

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For pandemic risk, an index can also be designed based on public health information or even on the price of stocks whose values ​​are sensitive to containment measures. The compensation of a parametric contract therefore depends on the forecast of a model constructed to quantify as precisely as possible the losses suffered by the insured.

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