Parametric insurance: A strategic tool for disaster management

THE Philippines has experienced the top 10 costliest typhoons in the past 15 years, with two super typhoons (STs) occurring just eight years apart: “Haiyan” (2013), also known as “Yolanda,” and “Rai” (2021), also known as “Odette.” Both were Category 5 typhoons with sustained winds of 252 kilometers per hour or higher, causing significant damage in the Visayas and Mindanao regions. The destruction of homes, infrastructure and agriculture resulting from these typhoons amounted to P95.5 billion (Haiyan) and P51.8 billion (Rai).

These two STs were highlighted during the 20th Asia Nat Cat and Climate Change Summit, organized by the Asia Insurance Review in Makati City, Philippines. With the theme “Forging Resilience: Building a Future-Proof Insurance Industry in the Face of Nat Cat Threats,” speakers discussed the crucial role of the insurance industry in providing protection and securing the future against the growing threats of climate change and disastrous natural events. Parametric insurance was emphasized as a key strategic tool for disaster management.

So, what exactly is parametric insurance? It is an innovative type of insurance that provides predefined payouts based on specific, measurable events rather than the actual loss incurred. This approach is particularly useful for covering risks associated with natural catastrophes, like earthquakes, hurricanes, floods and droughts. It also helps protect farmers against adverse weather conditions that can impact crop yields, such as excessive rainfall or drought. It insures against weather-related disruptions that affect energy production and distribution, like wind speed variations for wind farms.

The key characteristics of parametric insurance include payouts triggered by a predefined parameter, faster payments compared to traditional insurance and parameters based on objective and easily verifiable data from trusted third-party sources. Parametric insurance can also cover indirect costs and economic losses that may not be easily quantified or covered under traditional insurance policies. For example, it can provide immediate liquidity to businesses for operational continuity post-disaster.

Parametric insurance has been implemented in the Philippines as part of its disaster risk management strategy. The Philippine Catastrophe Risk Insurance Facility (PCRIF) was launched in December 2017 in collaboration with the World Bank and the Government Service Insurance System. It provides coverage against typhoons and earthquakes, offering quick financial support in the aftermath of natural disasters and facilitating faster recovery and resilience. The PCRIF was designed to provide immediate liquidity to the national government and local government units based on predefined parametric triggers.

In 2019, the city of Manila obtained a parametric insurance policy to safeguard against the financial consequences of typhoons. The initiative aimed to improve urban resilience and ensure swift financial assistance after natural catastrophes. The Asian Development Bank supported this endeavor, as they actively promote disaster risk financing solutions in the region.

Advantages

Regrettably, the Philippines did not have parametric insurance when STs Haiyan and Rai struck the Visayas and Mindanao regions. Had the Philippines had parametric insurance before STs Haiyan and Rai, the management of financial losses, as well as recovery efforts, could have been significantly improved.

One advantage of predefined payouts is that funds can be disbursed almost immediately after an event, eliminating the need for lengthy damage assessments. This rapid disbursement would have been crucial following STs Haiyan and Rai, which caused extensive devastation, displacement and loss of life. Immediate funds could have supported emergency response efforts, including rescue operations, medical aid and temporary shelter.

Both STs Haiyan and Rai caused substantial financial losses. Parametric insurance could have provided a financial safety net, reducing the fiscal burden on the government and fostering a more stable economic environment after the disaster. The swift availability of funds could have facilitated the reconstruction of infrastructure, restoration of public services and more efficient support for affected communities.

Parametric insurance encourages better disaster preparedness and risk management practices. It can drive the development of robust early warning systems and evacuation plans. Additionally, the presence of such insurance might stimulate investments in resilient infrastructure and community education on disaster preparedness, potentially mitigating some of the impacts of catastrophic events.

While parametric insurance cannot prevent the physical destruction caused by STs Haiyan and Rai, it could have played a critical role in mitigating financial impacts and expediting response and recovery efforts. By providing immediate liquidity based on predefined parameters, it would have enabled the government to mobilize resources more swiftly and address the urgent needs of affected communities more effectively.

The author is the founder and chief strategic adviser of the Young Environmental Forum and a director of Climate Tracker Asia Inc. He completed a climate change and development course at the University of East Anglia (United Kingdom) and an executive program on sustainability leadership at Yale University (USA). You can email at [email protected].