This article was first published by Guy Carpenter here.
A recurring theme in climate discussions involves the value of insurance coverage in helping to build resilience for vulnerable communities. Most recently, working with partners, Guy Carpenter introduced a parametric risk transfer initiative aimed at delivering affordable insurance to smallholder farmers in Mexico.
As Alberto Honsberg, CEO and Managing Director at Guy Carpenter México Intermediario de Reaseguro, told The ESG Insurer, the product will use a rainfall data set, captured by satellite technology. Each insured crop parcel will be allocated to a grid point for which the data is captured.
“Both drought and excess rain indexes have been built using this rainfall data, and it will be monitored on a daily basis by an independent party to provide transparency to the claim process,” Alberto explained.
For the excess rain cover, if the accumulated rainfall during a three-day period exceeds the determined level on any given grid point, a claims payment is triggered for all insured parcels within it, and the payout will depend on the amount of accumulated rainfall recorded.
In the case of drought, Alberto explained that a five-day moving average of rainfall will be estimated for each grid point, and if that value falls below 3mm, it will be considered a dry day.
“If the number of dry days during the coverage period exceeds the predetermined level, then all parcels located within it will be eligible for a payout, for which the amount will depend on the number of dry days,” he continued.”
Parametric covers are alternative risk solutions provided by insurance and reinsurance companies that enable organizations to finance or to transfer risk in a non-traditional way. Coverage is triggered based on reaching specific thresholds, such as accumulated rainfall during a set period of time, providing important protection to pave the way toward recovery from weather disasters, including windstorms and flooding.
Parametric solutions are a major part of the equation in Community-Based Catastrophe Insurance. This report, developed in partnership with the Wharton Risk Management and Decision Processes Center and Marsh McLennan, dives into the benefits of CBCI, possible structures, and sets out a five-part framework for CBCI implementation.