Rising Climate Risks Drive Insurance Industry to Develop Parametric Schemes
Jakarta (ANTARA) - The increasing frequency and impact of natural disasters in Indonesia are driving the need for risk protection mechanisms that are faster, more measurable, and more efficient. One approach becoming increasingly relevant in this context is parametric insurance, which is considered capable of accelerating the post-disaster recovery process.
As a country located in a disaster-prone region, Indonesia faces challenges in ensuring financial readiness to support rapid and sustainable recovery. In practice, recovery processes often require significant time and cost, necessitating instruments that can provide payment certainty in a short period.
Parametric insurance serves as an alternative solution with a mechanism different from conventional insurance. While traditional insurance claims are paid based on the verification of actual losses, parametric insurance claim payments are based on specific parameters or indices agreed upon at the outset. According to the World Bank, parametric insurance allows claim payments to be made immediately once the specified parameters are met, without the need to wait for a detailed loss assessment process. These parameters can include objective indicators such as rainfall, wind speed, wave height, or earthquake magnitude.
This approach is considered capable of increasing the speed of claim disbursement, which in some cases can be done within days, compared to traditional insurance processes that can take weeks or months. Furthermore, a report from the World Economic Forum highlights that parametric insurance plays a role in strengthening climate resilience, especially amidst the widening protection gap. Globally, a large portion of disaster-related losses remains uninsured.
Nevertheless, parametric insurance also faces challenges, such as the potential discrepancy between the value of the claim paid and the actual loss incurred, known as ‘basis risk’. Therefore, accurate parameter design is a crucial factor in the implementation of this product.
Development of Parametric Insurance in Indonesia
In Indonesia, the development of parametric insurance continues to be driven through collaboration between the insurance industry, reinsurance, and the government. One of the players involved in this initiative is PT Reasuransi Indonesia Utama (Persero), as a national reinsurance company.
The Director of Technical and Operations at Indonesia Re, Delil Khairat, stated that the parametric approach is becoming increasingly relevant amidst rising risks due to climate change. “Climate change is driving us to develop risk protection approaches that focus not only on technical mitigation but also on financial readiness that can be accessed quickly when a disaster occurs,” he said.
Furthermore, the Head of the Research Department at Indonesia Re, Fiza Wiraatmaja, explained that parametric insurance can serve as a risk transfer instrument on a macro scale, helping to reduce pressure on the state budget in disaster management. “This approach allows for a shift from post-disaster financing schemes to pre-event financing, so that responses can be carried out more quickly,” he explained.
In its implementation, several key factors determine the success of parametric insurance development, including the use of accurate data and risk models, funding capacity support through multi-stakeholder collaboration, technological and digital system readiness, and the involvement of the government, industry, and other stakeholders. Indonesia Re is also continuing to strengthen its capacity as a national reinsurer, including through capital strengthening and technological systems to support the development of parametric-based products.
From the industry side, the Indonesian General Insurance Association (AAUI), together with regulators, is discussing the strengthening of institutional and regulatory frameworks to support the implementation of parametric insurance in Indonesia. The General Chair of AAUI, Budi Herawan, stated that the ongoing discussions cover technical and operational aspects, as well as the formation of a consortium to support disaster risk financing schemes. “The hope is that, moving forward, there will be clarity regarding derivative rules and technical implementation, so that parametric insurance can be applied more widely and operationally,” he said.
In this context, the development of consortium schemes, either through the formation of new entities or the optimisation of existing ones, is one of the options being studied. The development of parametric insurance is part of the effort to strengthen national economic resilience in facing disaster risks and climate change. With a data-driven approach and rapid claim payments, this product is expected to become an important complement to the risk protection system in Indonesia. Moving forward, collaboration between the government, industry, and other stakeholders will be key to ensuring that the implementation of parametric insurance can run optimally and provide widespread benefits to the community.