Weather contingencies: parameterizing risk

Weather contingencies: parameterizing risk

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05.Apr.2021

Hurricanes, earthquakes and floods are just a few examples of the risks that the insurance sector is already parameterizing.

One of the main challenges facing humanity is climate change. The consequences of unforeseen weather associated with this phenomenon have repercussions not only on environmental quality, but also have a detrimental impact on situations of poverty, health, social conflicts, scarcity of resources, etc.

Increasing phenomena

Although the unpredictability of these phenomena makes it difficult to anticipate their effects, it is vital to include them in personal and business decisions. Insurance companies have done so by preparing for the increasing scale and frequency of these extreme events.

What does insurance cover?

Insurance covers a number of meteorological phenomena, compensating the insured party for material damages or their repair. Check the weather phenomena coverage of your policy, as it will have its own conditions depending on the insurance you have taken out. For example, in home insurance, one usually talks about wind (if the gusts exceed 80 km/h), rain (if more than 40 liters per square meter are recorded), lightning strikes (causing damage to both houses and gardens) and snow (without no minimum precipitation intensity), among others.

Extraordinary risks

Spain has an extraordinary risks insurance system by law, which is covered by the Insurance Compensation Consortium. This is a public entity attached to the Ministry of Economic Affairs and Digital Transformation, through the General Directorate for Insurance and Pension Funds, and it works thanks to the participation of insurance companies through the mandatory surcharge included in all insurance policies sold in Spain. This makes it a self-sustaining system that does not require any type of contribution from any public administration through taxes.

It performs several functions in Spanish insurance, including hedging against risks that are considered extraordinary, such as natural catastrophes, including those of hydrometeorological origin: extraordinary floods, earthquakes, tidal waves, volcanic eruptions or winds exceeding 120 km/h.

Parametric insurance

In addition to these extraordinary risks, covered through the CCS, the sector also works to cover claims according to scientific meteorological models that allow a swift response to these unforeseen events. This is known as parametric insurance, or index-based insurance, whose indemnities are based on the intensity of an event, the amount of accumulated loss, or scales previously agreed with the insurer.

Hurricanes, earthquakes or floods caused by rivers are some examples of risks that are already being parameterized. This insurance is executed when the parameters established in the policy are met, and once the claim has occurred they allow greater agility in resolving damages, speeding up payments, and eliminating management and administration expenses.

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