In the wake of a natural disaster, traditional insurance can help restore insured assets to their status prior to the loss. It may not always be desirable, however, to restore a situation that led to a vulnerable state in the first place. The public may want — and need — to create new approaches to urban planning, construction or water management that leverage lessons from the disaster, according to Guillermo E. Franco, Managing Director & Global Head of Catastrophe Risk Research at Guy Carpenter. Indeed, “building back better” is fundamental to reducing future disaster risk, but traditional insurance can only support building back what was there before.
Parametric insurance can help fill this gap. This type of insurance pays out when certain predetermined conditions (or parameters), which strongly correlate with losses, are met. We know, for instance, that wildfire-driven losses can be approximated by the location and size of the burnt area. Similarly, hurricane-driven losses correlate with the storm’s track, movement speed and wind and storm surge intensity. If a natural hazard exceeds a certain threshold for such parameters, insurance companies can assume that a certain loss has occurred — circumventing the need for a lengthy claims process. This offers an important advantage for public and private entities alike; however, here we focus on how public agencies specifically can garner control of the conditions for payment if they know what these should be.
This means that after a disaster, parametric insurance can quickly and transparently provide funds for response and recovery operations. Moreover, the absence of conditions for how funds should be spent means that public agents can disburse funds as the situation demands. Thus, while traditional insurance can play an important role post-disaster, parametric insurance provides the public sector with additional flexibility, boosting adaptability and resilience.