Parametric Insurance: Innovation in International Risk Management

A World of Global Risks

In international trade, risks are a constant; supply chain disruptions, natural disasters, economic and political fluctuations, among others. However, traditional insurance is often not agile or customized enough to address these challenges, which can lead to significant delays and losses.

This is where parametric insurance comes in, providing an innovative way to manage risk more quickly and accurately. These insurances are automatically triggered when certain predefined parameters are met (such as changes in weather or delivery delays), making them a powerful tool for exporters, importers and logistics operators.

2. What is parametric insurance?

Parametric insurance offers a direct and immediate solution based on a specific and measurable event, such as a change in temperature, a seismic event or the amount of rainfall in a given region. Unlike traditional insurance, which requires a damage assessment, parametric insurance is triggered when the preset parameter is met. This makes indemnification faster and more precise.

Example of parametric insurance:

Imagine a tropical fruit exporter in Mexico using parametric insurance that covers losses caused by extreme temperatures. If the temperature reaches a dangerous threshold during transport to Europe, the insurance is automatically triggered and the company receives compensation, without the need for a lengthy claims process.

3. Applications in international trade

Parametric insurance is flexible and can be adapted to various situations in international trade, among them:

• Protection against natural disasters: extreme weather changes can severely affect logistics routes and goods. Parametric insurance allows a rapid response to these events.

• Coverage for logistical disruptions: When shipments are affected by climatic phenomena or port stoppages, parametric insurance covers the economic losses resulting from these setbacks.

• Perishable goods insurance: The risk of products such as food and medicines being damaged by temperature mishandling or delivery delays can be mitigated with parametric insurance based on temperature or time.

Geographical application:

• Sub-Saharan Africa: Agriculture is crucial, and parametric insurance can protect against drought or excessive rainfall.

• Caribbean: Hurricane insurance to protect transported goods.

• Asia: Coverage against logistical disruptions due to natural disasters.

4. Advantages of parametric insurance

• Speed of payment: Payments are made almost immediately after the occurrence of the insured event, eliminating the need for lengthy investigations.

• Transparency: Rules and criteria are clear from the outset, reducing conflicts and increasing trust between insurers and insured.

• Flexibility: Parametric insurance can be designed for any type of measurable risk, from natural phenomena to operational delays.

5. Success Stories

• Caribbean Catastrophe Risk Insurance Facility (CCRIF): Implemented to cover several Caribbean countries against hurricanes and earthquakes, this system allows governments to receive quick payouts to manage the effects of natural disasters without the typical delays of traditional insurance.

• Natural disasters in Asia: Fresh produce exporters have used parametric insurance to cover losses arising from natural disasters, improving catastrophe response capacity.

6. Challenges of parametric insurance

Although the benefits are clear, there are also challenges to consider:

• Basis Risk: The insured event does not always exactly match actual losses, which can lead to under- or over-compensation.

• Dependence on accurate data: The effectiveness of parametric insurance depends on the quality and accuracy of the data used to measure the event (e.g., temperature, rainfall, etc.).

7. The Future of International Trade Protected by Parametric Insurance

Parametric insurance is changing the way companies manage risks in international trade. By offering speed, transparency and adaptability, these insurances are a vital tool to face the challenges of global trade.

If you are interested in protecting your business in a more agile and efficient way, parametric insurance is the future. It is time to adopt innovative solutions that allow you to minimize risks and maximize the continuity of your business operations.

Would you like to know how parametric insurance could transform the way you manage risk in your supply chain? Contact us today for a personalized consultation and find out how our innovative solutions can protect your business.

Sources Consulted

If you would like to learn more about parametric insurance and how it is revolutionizing the international trade insurance industry, here are some key readings that will complement the content of this article:

1. Parametric insurance - A clear introduction to the concept of parametric insurance and its application.

2. Arbol - What is Parametric Insurance and How Can It Enable Businesses Worldwide to Achieve Financial Climate Resilience
   Explores how parametric insurance can help businesses achieve financial resilience in the face of climate risks.

3. Innovations in Insurance Risk Management - This article explains how innovations are transforming risk management in insurance.

4. Swiss Re - What is Parametric Insurance?
   A clear explanation of what parametric insurance is, how it works and how it differs from traditional insurance.