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Increasing Resilience to Climate Change Through Parametric Risk Insurance

Increasing Resilience to Climate Change Through Parametric Risk Insurance

Parametric risk insurance—insurance policies that use environmental measurements to trigger an immediate payout—can play a key role in reducing the risks of climate change in developing countries.

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idea_bulbThe limited resources of many developing countries can leave them unable to finance disaster recovery efforts in the aftermath of natural disasters. In response to this trend, national governments, international financial institutions, and the private sector are increasingly developing and deploying innovative ways to help countries and people cope with post-catastrophe financial hardship—particularly in the area of risk management through insurance.

At the G-7 annual summit in June 2015, the leaders of the United States, Canada, France, Germany, Italy, Japan, and the United Kingdom zeroed in on the opportunity to help more countries and people in the developing world make use of insurance programs to better manage climate-related risks. At the summit, they announced an ambitious goal: to increase access to insurance against climate-related risks for 400 million new people in the most vulnerable developing countries by 2020. Climate-related risk insurance is currently available to 100 million people in developing countries and major emerging countries; achieving the G-7 goal would require creating five times as much coverage over the span of five years. From 1980 to 2006, the share of insured economic losses in developed countries grew from 20 percent to 40 percent, while in the developing world it held steady at approximately 3 percent.

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