The fourth session of the Community of Practice focused on the potential of parametric insurance as a tool to address climate-related risks, particularly in agriculture, and on identifying best practices for its implementation. Two guest speakers provided complementary perspectives: Heikki Tuomenvirta (FMI-PIISA) shared insights from recent surveys and pilot projects, while Paul Eberlein (Genillard & Co, SOTERIA) offered a broader overview of the mechanisms, advantages, and challenges of parametric insurance.

Key presentation highlights

Heikki Tuomenvirta presented the results of a European survey which revealed that 76% of respondents had experienced a natural hazard in the last five years and one in four had suffered economic losses as a result. Despite this exposure, awareness of parametric insurance remains extremely low, with more than 80% of respondents unfamiliar with the concept. The barriers identified include a lack of knowledge, the complexity of the product, issues of trust, and concerns about cost.

• As part of the PIISA project, one case study in Jaén province (Spain) is trying to develop a parametric insurance using a participatory approach in a region where olive farming is widespread. The product is based on rainfall thresholds and was co-designed with local farmers to ensure that it reflects their needs and expectations. This collaborative process proved valuable in aligning the insurance with local realities, though challenges remain regarding business feasibility, replicability, and trust in monitoring systems and data.

Paul Eberlein’s presentation offered an explanation of parametric insurance. Unlike traditional insurance, payouts are triggered by pre-defined and measurable events such as rainfall levels, wind speeds, or earthquake magnitude rather than by actual loss assessments. This mechanism brings advantages such as rapid payouts, greater transparency, lower administrative costs, and the ability to insure otherwise difficult or systemic risks. However, disadvantages are also evident. The most significant is “basis risk,” where payouts may not fully align with the actual losses incurred. Other challenges include reliance on accurate third-party data, complex trigger design, regulatory uncertainty, and occasional perceptions of unfairness.

• Drawing on examples from Allianz, Munich Re, and Swiss Re, as well as applications beyond agriculture (such as in tourism, shipping, real estate, and IT services), Paul illustrated the versatility of parametric products. He emphasized best practices, including minimizing basis risk through hybrid models, ensuring robust and transparent data sources, combining parametric with traditional insurance to layer risks, engaging regulators to provide clarity, and using blockchain technologies to automate payouts. Looking ahead, parametric insurance is expected to play an increasingly important role in managing climate-related risks, with opportunities in microinsurance, the use of IoT technologies, and smart contracts to expand its reach.

Discussion with the participants

• The discussion highlighted the ongoing challenges for wider adoption of parametric insurance in Europe, particularly among farmers. In Germany, for example, only 4% of farmers are insured against drought, and acceptance of parametric products is very limited. Many farmers prefer to self-insure due to a lack of trust in sensor data and concerns that rainfall recorded at weather stations does not always reflect conditions on their own land. Moreover, promotion of such products has been limited, with little support from government campaigns.
• Awareness-raising and education are essential to improve acceptance. Clearer communication about how triggers work, alongside increased transparency, could help build trust. Improvements in data quality, greater use of sensors, and the integration of IT tools may also reduce basis risk, though this adds complexity. 
• The discussion also touched on whether parametric insurance is too complex for farmers. It was agreed that the concept itself is relatively straightforward, but the main obstacle lies in trust and transparency. In regions affected by severe droughts, recent experiences may drive greater interest in these solutions.
• Finally, participants considered the integration of sustainability into insurance products. Currently, there are few strong incentives or premium reductions for sustainable practices. Some promising initiatives exist, such as Allianz’s system of rewarding farmers with points for adopting sustainable measures, and Portuguese schemes that reduce premiums for farmers who follow adaptation plans that reduce the risk, including in forestry insurance. These examples suggest ways in which sustainability could be better linked to insurance models in the future.

Key takeaways

The session highlighted that parametric insurance has significant potential to close protection gaps and respond quickly to climate-related risks, offering faster and more transparent payouts than traditional insurance. However, its uptake remains constrained by low awareness, limited trust in data, and concerns about basis risk. Increasing adoption will require behavioral tactics, educational campaigns, and clear explanations of how the insurance works, including demonstrations of real-world benefits. Best practices emphasize stakeholder engagement, hybrid approaches with traditional insurance, the use of robust and transparent data sources.

Overall, parametric insurance should be seen as a complementary instrument rather than a replacement for traditional insurance. Its value lies particularly in covering low-frequency, high-severity risks, where traditional loss assessment is impractical. Looking ahead, climate change, digital technologies, and innovative financing models are likely to make parametric insurance an increasingly important part of the risk management toolbox.

15 July 2025