August 2023

Quick Bite

In the aftermath of the 2022 floods, Nigeria counted a staggering loss estimated at $7 billion. But the damage itself is one part of the story. The provision for insurance (or lack thereof) was another.

Calculated Risk: Applying Parametric Insurance to the Natural Disaster Market 

Calculated Risk: Applying Parametric Insurance to the Natural Disaster Market 

The last decade has seen increased frequency and intensity of climate-related disasters. In 2022 alone, the global cost of climate-related natural disasters (floods, wildfires, droughts, etc.) was estimated at $275 billion. Of these, only 45% ($123 billion) of the damages were insured. This leaves nearly $148 billion in uninsured damages, with consequences for the economy and the people who suffer these losses. This article focuses on the potential role of parametric insurance and related technologies in mitigating these risks and providing new revenue sources for investors. 

The Natural Disaster Market: Key Economic Facts

Natural disasters such as floods, droughts, and storms are hardly new. However, a combination of factors, including climate change, increased global temperature, and rapid population growth have worsened the frequency and economic impact of these disasters. In 2022, the global economic damage from natural disasters was estimated at $275 billion. However, while 2022 broke a record, it fits a pattern of increased frequency, intensity, and economic impact from recent disasters vis-a-vis those that occurred 30 years ago as shown in the chart. Countries in the Americas, Europe, Asia, and Africa endured repeated episodes of heatwaves, extreme droughts, massive floodings, and wildfires among others. In Nigeria alone, the damage from the 2022 floods was estimated at $7 billion by the government. But the damage itself is one part of the story. The provision for insurance (or lack thereof) was another. 

Data Source: Our World in Data

Beyond the global economic impact of natural disasters, a key statistic of interest is the proportion of damages covered by various forms of insurance packages. Data from Swiss Re show that only 45% of global damages from natural disasters in 2022 were insured, thereby leaving 54% ($148 bn) uninsured. The reasons for non-insurance vary. These include increasing uncertainty on potential damage, absence of insurance products in specific geographies, and user concerns over endless paperwork and fine print among others. More so, some of the most affected regions, especially remote farming regions in developing countries, are hardly places of interest for insurance companies. So, could a product that addresses the above challenges while delivering adequate risk protection be developed? 

Parametric Insurance: A win-win for both sides? 

As described in the previous section, insurance companies are increasingly worried about unlimited liabilities. On their part, potential customers are worried about the lack of access to adequate protection and/or last-minute changes and fine prints by insurance companies as experienced post-hurricane Katrina. More so, high personnel costs discourage insurance companies from providing coverage to remote and agrarian locations that are increasingly exposed to the risk of crop and animal loss following major disasters. Parametric insurance policies could help. 

Swiss RE defines parametric insurance as a type of insurance that covers the probability of a predefined event instead of indemnifying actual loss incurred. An example would be parametric insurance offered to farmers in select flood-prone states in Nigeria. An objective and verifiable variable (say water level in location X that is reported in real-time) is chosen. If the threshold is crossed, pre-agreed payments are automatically made to policyholders in the select states. The benefits to the insurance companies include less paperwork, avoidance of physical deployment of staff to conduct pre-payment investigations, and a cap on liabilities. For the customer, the benefits include fast payments, the absence of extensive paperwork and other bureaucratic procedures, and a clear idea of how much would be paid in the event of a flood. This obviates the need for last-minute haggling over the exact amount policyholders should receive following these disasters. 

The simplicity and predictability of parametric insurance can be combined with recent technological advancements in smart contracts, fintech payments, and climate intelligence among others. Thus a system that connects automatically to verifiable climate intelligence sources (local temperature, water levels, etc.) coupled with a payment system could be developed so that payments are automated as soon as pre-determined thresholds are crossed in line with pre-agreed policy terms. Thus, local insurance companies can cover a larger swathe of the country, including farmers and other potential clients in low-income and remote areas, without incurring prohibitive personnel costs. More so, in addition to policy agreements with individual farmers, larger contracts can be signed with farmer cooperatives, SME associations, local/state governments, and more. For Nigeria and other African countries, the billion-dollar losses could become potential billion-dollar opportunities for insurance companies, insurtech startups, and catastrophe hedge fund investors. 


Climate-related natural disasters continue to grow in frequency, intensity, and economic impact. Some of the most affected places, including food-producing regions in Nigeria and Africa, lack access to predictable, well-priced risk management products. Parametric insurance combined with climate intelligence and fast payments could address the aforementioned concerns of insurance companies and potential policyholders. Investors could collaborate with existing insurance companies and fintech startups to roll out these products. These risks could in turn be securitized and sold to CAT hedge funds and other events-driven investors, thereby increasing the ability of insurance companies to sign on more policyholders. The research team at Kwakol will work with interested investors to develop and harness the above opportunity and provide further insights into the crucial demand-side dynamics. Contact us today!

Crystal Ball

A number of key events happened in the past thirty days. Wagner Group’s boss and a key backer of the Niger military coup, Yevgeny Prigozhin, died in a plane crash. This week, soldiers in Gabon toppled the president who was re-elected in a disputed election. The continued tepid response to coups in the subregion risks drowning West and Central African countries in a 1980s-like wave of coups and counter coups. We’re closely watching.  

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