New insurance is a game-changer in extreme weather

Extreme weather has battered our world in recent years, destroying private assets and infrastructure and leaving businesses reeling in their wake. Hurricanes, wildfires, floods and severe hail storms have become disturbingly routine occurrences, driven in part by climate change.

As we navigate these turbulent times of extreme weather, the insurance industry is undergoing a remarkable transformation. Regulators, policymakers and leaders in insurance came together at COP28 to discuss the industry’s role in combating the consequences of climate change while enabling better recovery from climate-linked disasters.

During the first week of the climate conference, delegates explored ways to meet the four interlocking goals of reducing emissions, accelerating community mitigation, keeping insurance affordable and available for vulnerable communities, and closing protection gaps between insured and uninsured losses.

Leading the way in adapting to these severe weather patterns and a changing insurance industry is the idea of parametric insurance, which offers a simple, customised and proactive approach to protecting businesses in this new era.

Picture this: your business faces the relentless fury of nature and the financial stakes are high, with the risks to movable and immovable assets becoming increasingly unpredictable. This unpredictability means insurers’ modelling of the frequency and severity of natural disasters is no longer reliable, making their pricing inaccurate and forcing them to price higher.

Traditional insurance models, designed for an era when weather extremes were less frequent, are struggling to keep up and need to find new ways of underwriting the additional risks that climate change brings. The result? A new, more responsive solution.

Enter parametric insurance, a fresh take on the established insurance model that simplifies the complex world of risk management. It’s not about clashing with insurers to recover losses after a disaster; it’s about insuring against specific, measurable triggers where the claim outcome is certain. It’s the new standard for control and precision in the face of unpredictable weather.

Imagine securing coverage against wind speeds exceeding 45km/h or a surge in sea levels in designated areas or receiving less than 120 hours of sunshine in a specific month, and should one of these triggers happen you get a predefined payout regardless of the effect on you. Parametric insurance is not indemnity based, it is about securing tailored certainty against that which is most threatening to your business. You are insured against an event and your claim is paid out depending on the magnitude of that event without needing to prove or substantiate your loss.

Parametric insurance is a game-changer, and it’s also a magnet for capital. Investors are flocking to this burgeoning marketplace, creating bonds worth billions of dollars to fund parametric insurance opportunities. The result? Lower insurance costs, particularly for businesses and consumers in high-risk areas. The only question is why wait for disaster to strike when you can proactively manage your uncertainty?

This innovative approach reduces the cost of insuring, streamlines claims processing and reduces the need for lengthy delays in getting alignment between insurer and client after the claim. In a world where time is of the essence, parametric insurance ensures fast payouts, bringing relief to policyholders when they need it most. No more waiting around; your financial safety net is assured and automated.

Parametric insurance also marks a significant shift in our industry’s approach to risk management. Parametric insurers help clients design programmes that fit their circumstances, and are also proactively investing in earlywarning systems and realtime monitoring, offering advice and recommendations to protect businesses and assets.

This could mean early warnings for sea surges, deep-sea earthquakes, tsunamis, hail storms or floods, all pushed to your phone proactively. Parametric insurers are always-on monitors, an early-warning system for life-changing and life-threatening weather incidents. It is all about the industry acting pre-emptively in the face of climate changerelated weather events.

The insurance industry, not known for innovativeness, is evolving to meet the challenges of climate change and the intensification of weather-related events. It critical that business owners ensure their coverage keeps up with the changes.

The transition from traditional models to parametric insurance is not just a step forward — it’s a leap into a future where businesses can thrive in the face of nature’s unpredictability.