Parametric insurance: A force for good

A version of this article by MNK Re Group Chief Executive and Managing Director Manoj Kumar and MNK Re Head of Innovation, Harry Titherley, was first published in the June edition of FA News.

The Covid-19 pandemic has compounded the long-standing problem of the protection gap in Africa, the increasing disparity between the insurable risks and the insured risks. This has been exacerbated further by a hardening market, widening the gap between needs and actual available coverage.

Traditional insurance markets and products no longer have all the answers, particularly in a market where there is increasingly a lack of trust between the insured and their insurers, with a growing consensus that more transparency is needed together with faster payment for claims.

We need to approach the problem in a different way. Parametric insurance is a truly disruptive insurance product, helping communities not only recover from disasters but also build resilience to help mitigate the impact of future extreme weather and natural catastrophe events. It can provide rapid and indisputable settlement of claims in the aftermath of a devastating event, ensuring that communities can rebuild quicker. It gives people the chance to get protection for risks that are underserved of excluded by traditional insurance. When you take the protection gap that exists in Africa into account this is game-changing.

Collaboration at intergovernmental, industry and community levels is crucial in order to allow this innovative product to flourish and extend coverage to the most vulnerable.

The benefit of cooperation was showcased by the establishment of the Caribbean Catastrophe Risk Insurance Facility (CCRIF) in 2007, the world’s first multi-country risk pool and insurance instrument to develop parametric solutions backed by both traditional and capital markets. Since its first payment in November 2007, the CCRIF has built resilience at mass-level within communities susceptible to natural catastrophe.

Inspired by the CCRIF, the African Union established the African Risk Capacity (ARC), a specialised agency designed to help governments better prepare for and respond to extreme weather events. What is unique about the ARC, when compared to other regional risk pools, is that it requires countries to develop effective contingency plans before agreeing to provide parametric insurance. The ARC assesses the impact of each pay-out, thus creating potential for governments to better anticipate and respond to disaster risk by strengthening capacities, awareness, and action.

Take the issue of drought, which is affecting millions of South Africans every year. The ARC uses the Water Requirements Satisfaction Index (WRSI), originally developed by the United Nations Food and Agriculture Organization, to monitor water deficits throughout the growing season and the distribution of rainfall. Combining this satellite-based technology with household survey data, the ARC creates a drought vulnerability profile of populations living within set administrative units of a country.

The use of this technology has been revolutionary to communities. Earlier this year, it was announced that communities across Mali were set to benefit from a $7.1 million pay-out by the ARC to the United Nations World Food Program following a drought in which almost two million people were put at risk of food insecurity. These funds are designated to provide support to communities impacted by climate-induced disasters. Madagascar will also benefit from membership of this risk pool, as it received a $10.7 million pay-out from the ARC in March after Tropical Cyclone Batsirai triggered the country’s parametric insurance coverage.

Nevertheless, considerable work still needs to be done to improve governments’ approaches to extreme weather. Data constraints, regulation, cost and lack of education all remain key issues that providers and governments need to address. While technology will continue to evolve and data availability will improve over time, helped in part by investment from the private sector, the onus is on international institutions and governments to offer more support to these initiatives, ensuring that parametric policies protect the most vulnerable communities against climate events.