Parametric Insurance: Using Objective Measures to Address the Impacts of Natural Disasters and Climate Change

Nostrand, James M. Van; Nevius, John G.

doi:10.1080/10406026.2011.607066

Cited by 11 publications

(7 citation statements)

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“…In contrast to the RMSE which weights events according to their impact, the root mean squared fraction (RMSF) (Eberenz et al, 2021) is an option that does not differentiate between events and weights them equally. Parametric insurance schemes are crucial to ensure liquidity (Van Nostrand and Nevius, 2011), in particular after big events. This focus on events causing large impacts favours the use of the RMSE for optimization.…”

Section: Designing Parametric Insurance Productsmentioning

confidence: 99%

A generalized framework for designing open-source natural hazard parametric insurance

Steinmann

Guillod

Fairless

et al. 2023

Preprint

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Insurance plays a crucial role in rebuilding after devastating events caused by natural hazards. However, the insurance protection gap (the difference between economic and insured damages) has been growing over the past 40 years. An innovative solution with the potential to contribute to closing this widening gap is parametric insurance schemes. Payouts are triggered by real-time hydro-/meteorological parameters rather than assessed damages, can be settled swiftly and ensure liquidity. In this work we propose a generalized framework for designing globally consistent parametric insurance schemes. One crucial aspect in the viability of parametric schemes is understanding the basis risk: the difference of the index-based payout and the actual damage. A systematic quantification of basis risk captures uncertainties and allows parametric insurance even in data scarce areas. Furthermore, building on open-source data and methods makes products accessible to low income stakeholders. We implement the framework in the open-source global risk assessment platform CLIMADA and illustrate it with two stylized parametric insurance case studies, targeting tropical cyclones in Mozambique and winter storms in France. Being globally-consistent, open-source, and readily available, the provided code base is easily adaptable to other hazards and exposures worldwide. This improves the accessibility to and the transparency of such innovative insurance schemes.

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Section: Designing Parametric Insurance Productsmentioning

confidence: 99%

A generalized framework for designing open-source natural hazard parametric insurance

Steinmann

Guillod

Fairless

et al. 2023

Preprint

View full text Add to dashboard Cite

show abstract

“…Such events are expected to increase in the future due to anthropogenic climate change (Christensen et al., ). There is therefore a pressing need to improve resilience for floods, especially in the developing world, and parametric risk transfer programs can be instrumental in this context (Van Nostrand & Nevius, ; Varangis, Skees, & Barnett, ). This is confirmed by the fact that the Caribbean have a multicountry risk pool in place based on parametric insurance (CCRIF SPC, ).…”

Section: Motivating Example—parametric Insurance For Jamaican Floodingmentioning

confidence: 99%

“…The payouts issued by parametric risk transfer products can be either fixed or based on a certain index value calculated for each event. In either case, they are not meant to offset actual losses, but instead to cover short‐term liquidity gaps following a disaster, and are typically used as a part of more comprehensive risk management strategies (Van Nostrand & Nevius, ).…”

Section: Introductionmentioning

confidence: 99%

“…Basis risk can be difficult to explain to end‐users, which is a well‐known problem in parametric risk transfer. This often results in unrealistic expectations towards the product (Van Nostrand & Nevius, ). During operational period, less technically informed users may be frustrated and perceive the product as ineffective when a destructive event occurs but the model simply issues a “no event” prediction, resulting in no payout, even though this is a plausible scenario (The World Bank, ).…”

Section: Introductionmentioning

confidence: 99%

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A Probabilistic Paradigm for the Parametric Insurance of Natural Hazards

et al. 2018

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There is a pressing need for simple and reliable risk transfer mechanisms that can pay out quickly after natural disasters without delays caused by loss estimation, and the need for long historical claims records. One such approach, known as parametric insurance, pays out when a key hazard variable exceeds a predetermined threshold. However, this approach to catastrophe risk, based on making deterministic binary predictions of loss occurrence, is susceptible to basis risk (mismatch between payouts and realized losses). A more defensible approach is to issue probabilistic predictions of loss occurrence, which then allows uncertainty to be properly quantified, communicated, and evaluated. This study proposes a generic probabilistic framework for parametric trigger modeling based on logistic regression, and idealized modeling of potential damage given knowledge of a hazard variable. We also propose various novel methods for evaluating the quality and utility of such predictions as well as more traditional trigger indices. The methodology is demonstrated by application to flood-related disasters in Jamaica from 1998 to 2016 using gridded precipitation data as the hazard variable. A hydrologically motivated transformation is proposed for calculating potential damage from daily rainfall data. Despite the simplicity of the approach, the model has substantial skill at predicting the probability of occurrence of loss days as demonstrated by traditional goodness-of-fit measures (i.e., pseudo-R of 0.55) as well as probabilistic verification diagnostics such as receiver operating characteristics. Using conceptual models of decisionmaker expenses, we also demonstrate that the system can provide considerable utility to involved parties, e.g., insured parties, insurers, and risk managers.

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“…There are a number of non‐traditional insurance and financial products available that cap government expenditure on disaster relief and recovery and can incentivise investment in mitigation, for example, parametric insurance models and catastrophe bonds (Borensztein et al. ; Margulescu and Margulescu ; Pagniez ; Van Nostrand and Nevius ). Although support for the use of these in Australia is mixed due to concerns they may create more uncertainty about the allocation of risk (APC, :421), cooperation between government and the insurance industry could assist to unlock these options in Australia (Pagniez ).…”

Section: Investing In Disaster Resiliencementioning

confidence: 99%

How Can Business Share Responsibility for Disaster Resilience?

Hunt

Eburn

2018

Aust J Public Adm

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This paper contributes to knowledge of disaster resilience policy implementation in Australia and proposes measures to strengthen partnerships between government and the business sector to enhance national disaster resilience capacity. In Australia, business makes a significant contribution to disaster relief and recovery. Even so, there are unexplored opportunities to enhance the role of business in disaster resilience, particularly through partnerships with government. The extent that state, regional and local-level disaster plans engage business in disaster relief and recovery is described and their relatively less prominent involvement in disaster resilience is discussed. Examples of disaster resilience policies and their capacity to influence business practices to support disaster resilience are introduced with suggestions for how they can be enhanced. Some potential benefits and pitfalls of public-private sector collaboration are explored and it is noted that, in disaster resilience settings, these risks can be ameliorated through appropriate implementation.

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Parametric Insurance: Using Objective Measures to Address the Impacts of Natural Disasters and Climate Change

Cited by 11 publications

References 0 publications

A generalized framework for designing open-source natural hazard parametric insurance

A generalized framework for designing open-source natural hazard parametric insurance

A Probabilistic Paradigm for the Parametric Insurance of Natural Hazards

How Can Business Share Responsibility for Disaster Resilience?

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