Uncertain waters: can parametric insurance help bridge NatCat protection gaps?

Economic losses from natural catastrophes (NatCat) are rising, with a significant proportion remaining uninsured. This protection gap presents critical risks to governments, financial stability and societal resilience, particularly in emerging market and developing economies, where small and medium-sized enterprises (SMEs) drive economic activity. Addressing this gap requires collaboration among governments, insurers, insurance supervisors and other stakeholders to ensure the availability, affordability and uptake of catastrophe insurance.

Parametric insurance offers a promising solution by providing rapid, predefined payouts triggered by measurable parameters, enabling quicker recovery and broader coverage. However, its adoption remains limited due to challenges such as basis risk, product complexity and regulatory barriers. This paper analyses the key design elements of parametric insurance, synthesising insights from a survey of 12 insurance supervisory authorities and seven market participants, with a focus on non-agricultural applications for households and SMEs.

Key findings stress the importance of transparent and reliable index selection, high-quality data and a supportive regulatory environment. The paper provides actionable recommendations to enhance data quality, improve analytical and modelling capabilities and foster consumer education and awareness. By addressing these challenges, parametric insurance can play a critical role in strengthening economic and societal resilience in the face of growing NatCat risks.

JEL classification: G22, G28, H84, Q54

Keywords: parametric insurance, index-based insurance, NatCat risks, protection gaps, NatCat protection gaps, climate change risks, risk management tools