“THE HOUSE ALWAYS WINS” - IS THIS THE CASE FOR PARAMETRIC INSURANCE?

“THE HOUSE ALWAYS WINS” - IS THIS THE CASE FOR PARAMETRIC INSURANCE?

The fact remains that insurance companies are “for profit” companies and not charities. No CEO of an insurance company will be applauded by his investors if he had to payout billions of dollars to the insured regardless of how meaningful the cause.

However in reality, insurance is a necessity to protect against unexpected events and spread risk. So how do we encourage vulnerable smallholder farmers to take on insurance? Particularly, parametric type insurance.

I had a chat recently with an agriculture business owner and he did bring out an interesting point; which is how someone like himself, who is not even a graduate, would be able to “out calculate” the dozens of PhD underwriters that would work towards coming out with a parametric solution that would be profitable for the insurer (ie lower chance of payout)

Since parametric insurance is potentially here to stay with its many advantages, the answer is for the insurer to be transparent and honest as to how the parametric insurance solution works and how the premium price is derived. Time must be taken to patiently educate smallholders on the advantages of the solution and under what conditions it will payout. Also important is the quality of data available to structure the parametric cover and used to trigger the payout. Both insurer and insured must go into the deal with both eyes open. It should never be a gamble but a mutually agreed and thoroughly understood insurance contract.

Unfortunately, not all agriculture parametric insurance covers have the potential to leave smallholders better off financially than self insurance (ie paying a premium with no payout when a loss is suffered). Furthermore, many parametric insurance products available in developing countries are unregulated, exposing smallholders to financial risk. Invariably, smallholder farmers considering to purchase parametric insurance feel no certainty their paid premiums will provide protection in the event of a disaster. There is naturally a resistance to buy such covers when there is a large basis risk coupled with a big price tag. In the case of many countries in Asia, uninsured risk for smallholder farmers impacts their economy which depend heavily on agriculture production. 

The good news is that in recent years, research and development of more accurate indices and models for agricultural parametric insurance have grown substantially, especially with advances in remote sensing and satellite technology. With indices becoming more accurate in reflecting losses, basis risk reduces. This would have a positive impact on increased adoption of insurance by smallholder farmers.

Parametric insurance could also play a significant role to support national level emergency aid programs. With increased frequency and severity of weather events, national protection budgets will be stretched to keep up with the number of smallholders that require financial aid after a disaster. 

Therefore it’s not true that the “House Always Wins” when it comes to parametric insurance. As long as there is clear understanding of the parametric insurance cover coupled with a robust solution, we can have a longer term "Win-Win" solution with parametric insurance.

#swissre #swissrecorporatesolutions # parametric #index #asia #insurance #weather


 


 

Sandra Megens

Environmental water governance adviser/Researcher/Drought & DRR/Community Resilience UNCCDCLP-LACmoderator

4 年

Parametric insurance is a nice way to less educate small holder farmers in Ecuador to refer as "resilience insurance" because they are tired from his government promises that agriculture, technology and innovation is everything..in the mean time another disaster appears..!

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Urs Leimbacher

Senior Public Affairs Advisor

5 年

Use of digital data such as #satelliteimagery also makes #parametricinsurance less costly than previous products. It thus becomes more affordable for more farmers, esp. in emerging markets. So parametric insurance helps bring the financial safety net of insurance to more people. That's how re/insurers like #SwissRe help make the world more resilient against the negative effects of climate change.

Kaushik Basu, PhD

Agribusiness Advisor

5 年

Interesting! With ML, deep learning, AI and big data, insurance is going to face the challenges like climate change, small holder farming in developing countries much stronger.

Jayabalasingam. P Jayaraman

Ex-International Visiting Manager /Advisor Plantations. - Freelancer Available for employment.

5 年

Farmers must be engaged in Dialogue during workshops i to understand the importance of PARAMETRIC INSURANCE.

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