Application of EO in parametric insurance instruments for risk financing and climate resilience in support of the 2030 development agenda
Parametric insurance represents a major breakthrough in the accessibility of risk financing for natural disasters. Instead of compensating for actual assessed loss, parametric (or index-based) insurance instead uses measurement of the hazard itself as a proxy for loss, paying out a pre-agreed amount for an event with certain intensity, location and, sometimes, duration. This allows for rapid settlement and reduced costs – of claims adjustment / processing and in the margin added by risk takers for uncertainty in projected outcomes. The quantitative, independent and objective nature of EO data, and also its availability in real time, makes it ideal as a basis for parametric insurance, particularly in the developing world where claims data for policy pricing is non-existent. Examples of parametric products based on EO data already in the market include protection against high and low rainfall, use of vegetation greenness indices, and footprint mapping as a basis for flood protection.