Using Parametric Insurance to Mitigate Global Climate Risk

Climate change will intensify extreme weather events. In addition to tragic direct consequences that include deaths and physical damage to homes and businesses, these storms pose enormous financial risk to small and geographically concentrated financial institutions because of the correlated risk among borrowers: a single storm could cause an institution to become insolvent if delinquency rates spike. In low- and middle-income countries, small-scale banks are ubiquitous and often serve the bulk of the population. The CLIMBS Life and General Insurance Cooperative is a Philippine-owned and operated insurance firm that supports village-level cooperative banks typically serving between 1,000 and 10,000 residents with loans and savings products. 

The Philippines face on average 20 named typhoons per year, each of which poses a risk to the financial solvency of these cooperative banks. CLIMBS is therefore partnering with the London-based insurance firm Global Parametrics to offer parametric cyclone insurance to help protect its member cooperative banks. Unlike traditional insurance that requires an in-person evaluation of damages to determine payout, parametric insurance is triggered remotely: in this case, the detection of a specific quantity of precipitation and/or wind speeds by ERA5 satellites. 

Researchers will conduct exploratory work to assess the feasibility of evaluating CLIMB's parametric cyclone insurance. They seek to address a few questions: (1) how geographically-correlated weather shocks affect the financial sustainability of small-scale financial institutions, (2) how decision-makers at such institutions evaluate cyclone insurance as a tool to manage risk in their lending portfolios, and (3) who is better suited to adopt cyclone insurance (individual farmers or village cooperatives).