Antoine Bavandi (pictured), global head of public sector, parametric and climate resilience solutions at Gallagher Re, discussed how parametric insurance is being applied to address the growing protection gap – the shortfall between total economic losses from disasters and the portion that is insured.
As climate-related and systemic risks become more prominent, conventional indemnity-based insurance models have shown limitations in delivering timely payouts or adapting to new exposure types.
Parametric insurance, which triggers payments based on measurable event data rather than loss assessments, is increasingly seen as a tool for improving disaster response and financial preparedness.
“The main difference lies in the predictability and objectivity of the claim settlement mechanism,” Bavandi said. “Parametric payouts are based on predefined triggers rather than actual loss assessments.”
These triggers are usually tied to data from independent third-party sources, such as the US Geological Survey for seismic events. When the agreed-upon parameters – like earthquake magnitude – are met or exceeded, the policyholder automatically receives a preset payout. This system bypasses the lengthy damage assessment process associated with traditional claims.
“This approach offers several advantages, especially in the face of new or evolving risks such as climate change, natural disasters and pandemics,” Bavandi said. Among those, the speed of payout is key.
Policyholders typically receive funds within days or weeks, which supports quicker recovery for businesses and communities. In contrast, indemnity-based claims often involve a multi-month process due to post-disaster backlogs and on-site evaluations.
He also noted the model’s adaptability: “Parametric insurance is also highly customizable, allowing businesses to tailor coverage to specific needs, assets or risks that are otherwise difficult to insure.”
Bavandi highlighted a rise in adoption for perils that were not historically associated with parametric triggers. “It is proving highly valuable for clients that have been newly affected by certain perils such as severe convective storms (SCS), hail or droughts in ways never experienced before,” he said.
The combination of enhanced data, remote sensing technology, and improved weather models has broadened the scope of use. “The parametric data-driven approach combined with recent analytical advancements – not only enhances accuracy and responsiveness but also enables new applications and addresses traditional market gaps,” he said.
Bavandi cited Gallagher Re’s role in structuring and placing a growing number of parametric SCS reinsurance transactions to meet evolving insurer needs.
Bavandi emphasized that parametric solutions are particularly relevant in the public sector, where traditional insurance penetration is often limited.
“Parametrics have been a game-changer and a long-term partner for public sector clients, particularly in developing countries where traditional (re)insurance penetration rates continue to lag behind economic growth,” he said.
These mechanisms offer governments and humanitarian partners access to immediate funding for emergency response.
“By leveraging the rapid and customizable nature of parametric products, governments, development and humanitarian partners can secure optimal funding for emergency response and recovery,” Bavandi said. “This is particularly important in times of high geopolitical uncertainty, where post-disaster donors’ assistance is scarce and less reliable than it used to be.”
He added that these products can help ensure critical services continue operating after a disaster. “Parametric structures are often an efficient way to cover critical infrastructure and services against natural disasters, providing public entities with immediate liquidity to reinstate operations and minimize socio-economic disruptions.”
Gallagher Re has played a role in structuring parametric programs for sovereign clients, including its partnership with African Risk Capacity (ARC) Ltd. Through this collaboration, the broker has helped design and implement disaster risk financing strategies for 19 African nations, delivering over US$1 billion in cumulative coverage.
According to market data, the global parametric insurance sector was valued at US$11.7 billion in 2021 and is projected to grow to US$29.3 billion by 2031. This projected growth reflects broader interest in risk transfer mechanisms that can respond quickly to climate events, market shocks, and emerging perils. The sector’s trajectory suggests that more private and public entities are incorporating parametric options into their overall resilience planning.
As technology advances and demand for timely risk financing grows, Bavandi sees parametric insurance playing a long-term role in closing the protection gap.
“Its speed, transparency and flexibility make it an attractive option for addressing the diverse risks faced by individuals, businesses, insurers and governments,” he said. “By embracing parametric insurance, our industry can play a pivotal role in closing the protection gap.”
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