Climate risk insurance is evolving rapidly. Propelled by advances in geospatial analytics, AI-driven modelling and cross-sector collaboration, insurance mechanisms are emerging that go beyond loss recovery to strengthen resilience, according to an article published on the World Economic Forum’s website.
“The market is not short of climate physical risk modelling, with tools ranging from proprietary software developed by insurance companies, such as Zurich Insurance, AXA and Swiss Re, to solutions offered by specialised data analytics firms and the ‘Big Four’ consultancies,” wrote Dr Agnes Tai, director of Great Glory Investment Corporation. She is also a member of the World Economic Forum’s Global Future Council and supervisory board member of the Climate & Nature Governance Global Reporting Initiative. The article, part of the Centre for Climate and Nature, expresses the author’s views.
Dr Tai also said, “The commercial coverage that surfaced three to four years ago was driven by efforts of the World Bank Group dating back to 2016, usually in collaboration with governments in developing countries. Since then, advances in geospatial, asset-level intelligence, increased modelling accuracy in the frequency and severity of natural disasters, as well as heightened awareness of climate-related risks and losses, have accelerated the development of innovative insurance products. These technologies enable more transparent, data-driven triggers — essential for scaling new forms of climate-risk transfer.”
She highlighted several initiatives in climate insurance:
- The World Bank and International Finance Corporation participated in the Global Innovation Lab for Climate Finance, which included developing new insurance mechanisms for emerging markets. One such mechanism was paying benefits based on a pre-determined index, with index insurance helping stabilise incomes for an estimated 2.5bn small farmers globally. The index objectively tracks indicators, such as rainfall and livestock mortality rates, to estimate losses incurred from severe weather or catastrophic events. This represents a significant shift towards objective, parametric-style coverage, reducing the time and administrative burden associated with traditional loss assessments.
- The biggest effort is the Global Index Insurance Facility, a multi-donor fund managed by IFC and the World Bank, servicing 1.3m farmers across 31 countries. This provides the blueprint for a commercial analogue, with parametric insurance now being offered by AXA and Zurich Insurance. These early development-led initiatives demonstrate the operational viability of index-based products, paving the way for broader commercial expansion.
- Africa Risk Capacity is a programme that pays benefits when a pre-agreed threshold event occurs, such as a sufficiently severe deviation from normal rainfall levels. The World Bank Group, along with private insurers, supports similar programmes in the Caribbean and Pacific regions. Private insurers benefit because it reduces losses to the national economy and the fast deployment of payments accelerates recovery.
Innovative insurance solutions
Some new and increasingly relevant insurance solutions that help organisations better assess, manage and transfer climate-related risks include parametric insurance, sustainability-linked insurance, resilience bonds, and self-insured alternatives. M