Trigger flaws challenge growth of parametric insurance

Rapid expansion faces hurdles from flawed triggers and basis risk.

Asia-Pacific is seeing rapid growth in parametric insurance, with premiums rising more than 19% year-on-year. Fast, transparent payouts make the product attractive, but experts warn that flaws in triggers and coverage design could limit its effectiveness as climate risks intensify.

Andre Martin, Head of ART Structuring Asia & ANZ at Swiss Re Corporate Solutions, said parametric insurance “fundamentally requires two things. We need objective, reliable data post events, which allows us to assess whether or not the policy has been triggered. But we also need historical data series, and this is for the purpose of modeling, calibration and pricing accuracy.”

While robust datasets exist for major perils like typhoons and earthquakes, Martin noted gaps in emerging markets and smaller weather events. “Sometimes this data is scarce. It is unstructured and sometimes not even available,” he said. He added that although parametric insurance has moved “very firmly from exotic into the mainstream,” a lingering “awareness gap” continues to slow adoption.

Ruth Lux, Private Sector Co-Chair of the Sovereign and Humanitarian Solutions Working Group at the Insurance Development Forum, stressed that coverage mismatches remain a critical obstacle. “Parametric insurance is not a silver bullet. It can't cover every risk and has inherent limitations,” she said. “One of the biggest challenges is what we call basis risk. That's when payouts don't perfectly align with actual losses.”

To close these gaps, Martin pointed to advances in analytics enabling “intensity triggers” such as earthquake shaking or typhoon wind speed at insured sites. Multi-trigger solutions, he said, also improve coverage, with central pressure serving as “a very good proxy for rainfall and resulting floods.” Locally installed sensors are gaining ground to sharpen accuracy for floods and hailstorms.

Lux emphasised product design and layered strategies, combining parametric tools with reserve funds, contingent credit and indemnity cover. “Public private partnerships are also critical with governments, development actors and insurers, co-designing solutions together,” she said. Transparency and monitoring at the community level, she added, are essential to build trust.

Despite constraints, Martin highlighted the model’s ability to protect against “pure financial, pure economic losses that are not triggered by physical damage,” including supply chain disruptions. Liquidity is key: “The payout is extremely transparent and very quick.”