Natural hazards caused $380 billion in economic losses last year, and only 31 percent of those losses were covered by insurance. With climate-related shocks and stresses increasing globally, those losses could skyrocket without direct action to build climate resilience and invest in adaptation solutions. Parametric insurance has the potential to be one of those solutions by helping those affected by natural hazards recover and rebuild more quickly.
Parametric insurance pays policyholders a predetermined amount based on the occurrence of a specific “trigger" event, like flooding or extreme heat. Because the payouts are based on predetermined parameters—such as rainfall levels or heat indexes—rather than actual damages, the claims process moves faster and is less costly to manage. Deploying this capital quickly means those affected by natural hazards can begin to rebuild sooner, with an eye to reducing future impacts. This helps lessen the overall economic impacts and boosts resilience against future climate shocks.
While these products show strong potential for climate adaptation, the market is nascent, particularly in developing countries. Donors can bridge this gap by supporting businesses that are testing these insurance models and trying to scale them to reach vulnerable communities. Through the USAID Climate Finance for Development Accelerator (CFDA), USAID recently awarded four grants to companies working across the parametric insurance space. These awards were made through CFDA’s Adaptation Finance Window, which seeks to accelerate the pace of private investment and market development for climate adaptation.
CFDA hosted a webinar to showcase three of these grantees’ work. Below are excerpts from that conversation.
This conversation has been edited for length and clarity.
Today, we're diving into the world of innovative insurance solutions with Sarah Ebrahimi from Blue Marble, Simon Schwall from OKO, and Rohan Srinivasan from Floodbase. Let’s start with what your company does in this space.
Sarah Ebrahimi (Blue Marble): We’re an impact insurtech (insurance technology) company, bringing insurance solutions to underserved communities worldwide. We offer parametric climate insurance products to promote climate and financial resilience. For instance, we’ve partnered with Nespresso to create an insurance product for smallholder coffee farmers in Kenya, protecting against income instability from adverse weather and market fluctuations in the price of coffee.
Simon Schwall (OKO): We design weather-based index insurance, providing a full end-to-end solution. We use proprietary actuarial software and remote satellite weather monitoring. Our focus is on last-mile distribution through mobile payment systems and web apps.
Rohan Srinivasan (Floodbase): With 83 percent of flood losses uninsured, we address this gap using near real-time monitoring from satellite imagery and machine learning algorithms to assess flooding. We work with smallholder farmers, brokers, and local distributors to ensure access to flood coverage alongside other insurance.
What has the claims experience been like for farmers and what percentage of claims are paid?
Ebrahimi (Blue Marble): Parametric insurance is unique because it bypasses the typical claims process and pays farmers based on the event’s magnitude. But at Blue Marble, we also offer parametric insurance that we bundle with tangible benefits. If we only offer benefits in the worst-case scenario, clients might not trust that the insurance is worth the cost.
For example, in India, we offer an extreme heat income protection product for women. However, last year’s heat season was the eighth coolest season in 124 years and the insurance product did not trigger a payout. But because of this we also offered our customers the tangible benefit of receiving a solar lamp, a shade tarp, or a water cooler with their purchase of insurance. This helped build trust and underscored the value of insurance as a crucial financial service.
How do you solve the issue of affordability of insurance premiums in these contexts where financial resources are scarce?
Schwall (OKO): We've been told that farmers can't afford insurance without subsidies, but we've proven otherwise. Out of 27,000 farmers insured by OKO, most paid themselves. We made it flexible: farmers can pay via mobile wallet, in installments, and we adjust coverage based on what they've paid.
Affordability remains the biggest barrier, especially with high costs at the growing season's start. We're exploring various solutions—like state subsidies and partnerships with food industries for partial subsidies—to make payments easier and insurance affordable.
How can donors like USAID make the most impact here?
Srinivasan (Floodbase): Although the initial market size and scale may seem small, and the costs of training and monitoring are high, the long-term impact and proof of success for parametric solutions lie in these disaster-prone areas. This requires patience and time to develop properly, and that’s where USAID funding can give us room to grow.
Yasmine Alotaibi Williams
Yasmine Alotaibi Williams is a senior communications manager with the USAID Climate Finance for Development Accelerator.
