The Future of Disaster Resilience: Spotlight on Parametric Insurance with Alex Kaplan

Summary of ISD and StateBook April 15 webinar presentation by Alex Kaplan Executive Vice President for Alternative Risk, AmWINS

Parametric Insurance: A New Tool for Disaster Recovery and Community Resilience

According to NOAA, the natural disasters of 2023 and 2024 caused over $400 billion in economic damages. As extreme events continue to impact communities across the United States, economic development officials are searching for innovative financial tools to enhance disaster recovery and resilience. Parametric insurance is rapidly gaining traction as an important strategy in this effort. To provide some background on what it is and how it works, the Institute for Sustainable Development (ISD), in partnership with StateBook, hosted a webinar on April 15 with Alex Kaplan one of the leading pioneers of emerging insurance products like parametric insurance, to find out more.

Understanding the Disaster Finance Gap

The financial burden of disasters on communities is staggering. Annual natural disaster costs have been averaging $150 billion during the decade of the 2020s, yet traditional funding sources fall short: insurance covers only 30-50% of these costs, and the federal government covers 20-40%. Making matters worse, over 50% of federal disaster requests were denied last year, and federal thresholds have been raised fivefold.

This growing gap between disaster costs and available funding has prompted state and local leaders to explore alternative financing mechanisms. Parametric insurance could be an important part of the answer.

Parametric Insurance: A Different Approach to Coverage

Unlike traditional indemnity-based insurance that covers specific assets, parametric insurance indemnifies an entity's balance sheet against specific event characteristics. Using pre-agreed triggers—such as wind speed, ground shake intensity, or rainfall measurements—parametric policies determine coverage for natural disasters automatically.

The key benefits of this approach include:

·      Speed of payment: Claims can be processed quickly based on objective data, providing faster relief than traditional insurance or FEMA

·      Flexibility: Funds can be used for any purpose, including lost revenue and intangible costs

·      Transparency: Payouts are based on third-party data sources, eliminating lengthy claims processes

Covering Revenue Losses

Parametric insurance serves as a complement to traditional insurance by focusing on coverage for lost revenue and other intangible costs. During the 2017 California wildfires, for example, cities faced significant financial strain from unreimbursed tax and business revenue losses—costs that neither traditional insurance nor government programs typically cover.

Types of Coverage

Parametric insurance can be structured for various natural disasters, with named storms being the most common. Coverage options include:

·      Named storms: Using either traditional "cat in the circle" methods or newer, more precise "wind at location" (based on maximum sustained wind speed at insured location(s) with a bespoke payout structure based on the client’s needs) models that assess damage based on specific wind speed metrics

·      Earthquakes: Triggered by ground shake intensity rather than just magnitude

·      Wildfires: Monitored through satellite imagery

·      Floods: Tracked using ground sensors and satellite data

Making Parametric Insurance Affordable

When asked about affordability concerns, Kaplan emphasized that it's a question of value rather than price. Public entities can begin with smaller coverage amounts—starting with manageable parametric policies—and gradually increase limits while maintaining responsive trigger mechanisms. This approach allows communities to become comfortable with the concept before making larger investments.

Premiums are determined primarily by the probability of specific events affecting revenue streams, using historical performance data to model rather than underwrite the risk. Even in high-risk areas like the Northern Mariana Islands, which face frequent typhoons, Kaplan noted that the overall risk remains manageable when properly structured.

Beyond Insurance: Strategic Planning Tool

Kaplan stressed that parametric insurance is not a "silver bullet" solution. However, the process of designing and analyzing parametric coverage can reveal important insights about risk and mitigation strategies. He shared a compelling case study of New York's MTA, which used parametric insurance analysis to determine optimal flood wall heights, demonstrating how physical and financial resilience can work together.

Advice for Economic Development Officers

For economic development officials considering parametric insurance, Kaplan offered clear guidance: start by clearly defining the specific problem you aim to solve. This definition will guide the selection of data sources and trigger design.

He also suggested a layered approach, where different levels of government—state, Council of Governments, and local—could handle different tiers of indemnification challenges. This coordination could create a more comprehensive safety net for communities facing disaster risks.

Practical Implementation

Public sector entities are already using parametric insurance to complement traditional coverage, particularly for large assets with high deductibles. Some municipalities purchase flood insurance and distribute funds directly to residents and small businesses during disasters, providing immediate relief while traditional claims processes play out.

Kaplan also discussed emerging trajectories for parametric insurance, including predictive solutions that allow pre-event capital release for mitigation efforts, and peril-agnostic structures that use economic data as proxies for loss impacts.

Moving Forward

As communities across the Southeast and beyond face increasing disaster risks and shrinking traditional funding sources, parametric insurance offers a promising complement to existing disaster finance tools. While not appropriate for every situation, it provides speed, flexibility, and transparency that can help communities respond more effectively to disasters.

The webinar, part of ISD's Academy project to capture the wisdom and experience of expert practitioners in the fields of community and economic resilience and disaster recovery, demonstrates the institute's commitment to equipping local community leaders with innovative tools for building resilience.

For more information about parametric insurance and other disaster finance tools for emergency management and economic development officials contact info@isdus.org for additional resources and guidance.