Parametric weather insurance is an innovative form of insurance that pays out benefits based on a predetermined index for weather conditions, such as rainfall levels, temperature, wind speed, etc., rather than on the actual loss incurred. This type of insurance has become increasingly relevant due to its efficiency in claims processing and payout triggers. Here's an in-depth look at how parametric weather insurance payouts function, using a specific example.
The essence of parametric insurance is its simplicity and speed. Instead of assessing the actual damage after an event, payouts are triggered when predetermined parameters are met. For instance, if a farmer purchases a policy for insufficient rainfall and the agreed parameter is 50mm of rain over a specific period, the policy will pay out if the rainfall is below this threshold, regardless of the actual damage suffered.
Example Case Of Rainfall Parametric Weather Insurance Payout
Consider a parametric weather insurance product with the following parameters and payout structures (as illustrated in the image below):
Start Date: 15/07/2023
End Date: 15/11/2023
Maximum Payout: $100,000
Premium: $13,034
This product includes three different structures for payout:
Structure One: Covers for a deficient rainfall event and pays $500 per mm below 100mm to a maximum of $20,000 over the risk period. The maximum payout occurs at 60mm.
Structure Two: Covers for a more severe event and pays $1,000 per mm below 80mm to a maximum of $30,000 over the risk period. Here, the maximum payout also occurs at 60mm.
Structure Three: Is designed for a catastrophic year and pays $5,000 per mm below 50mm to a maximum of $50,000 over the risk period. The maximum payout for this structure occurs at 40mm.
Historical Payouts
Looking at historical data:
In 2002, the area received 65mm of rain, activating structure one, which paid out $17,500.
In 2006, the rainfall was 82mm, so only structure one paid out $9,000.
In 2014, 52mm of rain triggered full payouts from structures one and two, totalling $48,000.
In 2019, an extremely low rainfall of 43mm resulted in full payouts from all three structures, culminating in $85,000.
Implications for Australian Agribusiness
Parametric weather insurance offers a range of benefits, such as:
Predictability: Farmers and businesses can plan their finances better, knowing the exact conditions that trigger a payout.
Speed: Payouts are typically faster because they don't require claims adjustment or loss assessments.
Coverage Efficiency: Such policies can be tailored to cover the precise weather risks that a business or individual is exposed to.
Parametric weather insurance represents a shift towards more efficient risk management tools in the face of climate uncertainty. By relying on objective indexes rather than subjective assessments of loss, it provides a clear, transparent, and timely financial response to adverse weather events.
For those in sectors like agriculture, where weather is a significant factor, this type of insurance could be a game-changer, providing financial resilience against the increasingly unpredictable patterns of global climate.
Through this example, it becomes clear why parametric insurance is not only practical but essential for those whose livelihoods are closely tied to weather conditions. As the world faces more extreme weather events, parametric insurance is becoming a cornerstone of risk management and financial planning.
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