Even as countries across the globe grapple with climate change, alternate risk transfer mechanisms like parametric solutions are emerging as the best option. A parametric transaction uses the physical characteristics of a catastrophe event as the trigger. A catastrophe bond (CAT) is a high-yield debt instrument that is designed to raise money for companies in the insurance industry in the event of a natural disaster. A CAT bond allows the issuer to receive funding from the bond only if specific conditions, such as an earthquake or tornado, occur.
According to a PwC report, the insurance protection gap could reach $1.86tn by 2025 and Asia Pacific could account for nearly 50% of all uninsured risks.
Aon’s Weather, Climate and Catastrophe Insight has pegged economic losses in 2021 at $343bn, of which only $130bn were insured, leaving the global protection gap at 62%.
However, these figures do not tell the true story. The US contributed 71% of the total insured losses and it is an economic superpower that can support communities through government-backed disaster relief. Developing countries do not enjoy this luxury and the maximum impact of disasters is often borne by the most vulnerable communities themselves.
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