Parametric cover key to future agricultural risk challenges

The growing complexity of current and emerging risks is seeing companies increasingly looking to parametric insurance coverages.

Insurance broker New Dawn Risk, has published a white paper which examines the move toward parametric insurance in an effort to simplify the coverage of a dynamic risk landscape.

It said several dynamic changes in today’s insurance environment have made risks unpredictable, rendering them difficult to model and tricky to determine accurate return periods. These changes have led to certain lapses in coverage, creating a growing need for innovative solutions. In response, parametric insurance has emerged as an effective risk mitigating solution that offers certainty and protection for these gaps.

New Dawn Risk’s latest whitepaper, Parametric insurance: The scope of solutions for agriculture and natural catastrophe risks, launches today, and examined the trends, triggers and unique solutions associated with this non-traditional insurance product.

Aditya Singh, Head of Treaty at New Dawn Risk, commented: “Many global providers prefer parametric insurance, as it does not require them to understand the complexities of the inherent risks vis-à-vis the assets, they invest in. This whitepaper discusses the fundamental ability of parametric insurance to cover products ranging from complex agricultural risks to property damage arising out of large natural catastrophe events.”

He added: “Climate change and the increased frequency and severity of extreme weather events are causing immense damage to crop and agricultural land. A study by researchers at Stanford University found that higher temperatures attributable to climate change caused payouts from the nation’s biggest farm support programme to increase by a staggering $27 billion between 1991 and 2017. Costs are likely to rise even further with the growing intensity and frequency of heatwaves and other natural catastrophes.

“In 2021, analysts at KBW warned that crop losses would likely weigh on insurers’ overall underwriting profits, despite being overshadowed by more high-profile catastrophe losses such as Hurricane Ida and European flooding. While this picture looks daunting, there is a way forward that can benefit both farmers and insurers.”

The publication said the need for risk financing solutions in countries with low insurance penetration has long been recognised as a critical area of focus for the industry, particularly for funding recovery efforts following a catastrophe.

To date, efforts have focused on government-backed risk pooling schemes, such as the Caribbean Catastrophe Risk Insurance Facility, which pays out to selected governments in the region following major natural catastrophe loss events such as hurricanes and earthquakes.

“There is also a growing case for the deployment of parametric insurance coverage in underdeveloped countries to facilitate payments to individual policyholders following loss events,” the broker added. “With climate change driving incidents across a range of perils, flood, drought, wildfires, etc, farmers, small business owners, and householders around the world increasingly need workable insurance solutions that pay out quickly following a claim.

“The technology now exists to enable real-time reporting of a number of perils, using accurate, reliable and often freely available data. This means it has been possible to place parametric insurance coverage across a wide spectrum of risk types, including earthquake, hurricane, drought, and flooding.”

New Dawn Risk, CEO Max Carter, added: “Ultimately, parametric insurance can provide an affordable solution for large-scale insurance of catastrophic risks in exposed areas, and we expect this to become more widely adopted over the next several years.”