IDEAS home Printed from https://ideas.repec.org/a/bla/rmgtin/v23y2020i2p121-150.html
   My bibliography  Save this article

Application of parametric insurance in principle‐compliant and innovative ways

Author

Listed:
  • Xiao Lin
  • W. Jean Kwon

Abstract

There has been a rise of innovative parametric insurance solutions in recent years covering a wide range of risks and serving clients from individuals, to businesses, and to governments. These parametric insurance products cover risks that are otherwise uninsured or underinsured, by simplifying product design and reducing transaction costs. This paper offers a comprehensive review of parametric insurance including a classification of the types of contract and an overview of market practices. We outline the benefits and concerns of parametric insurance in comparison with indemnity insurance, and discuss the legal principle and regulatory compliance matters. We then survey the current global market and identify areas where insurance and reinsurance companies can play important roles in offering or supporting parametric insurance operations. Lastly, we offer a case study on a type of parametric insurance designed to cover earthquake risk in California.

Suggested Citation

  • Xiao Lin & W. Jean Kwon, 2020. "Application of parametric insurance in principle‐compliant and innovative ways," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 23(2), pages 121-150, June.
    • Handle: RePEc:bla:rmgtin:v:23:y:2020:i:2:p:121-150
    DOI: 10.1111/rmir.12146
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/rmir.12146
    Download Restriction: no
    File URL: https://libkey.io/10.1111/rmir.12146?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Disaster Risk Reduction Section, ICT and Disaster Risk Reduction Division, ESCAP, 2015. "Financing Disaster Risk Reduction for Sustainable Development in Asia and the Pacific," MPDD Working Paper Series WP/15/09, United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
    2. Dean Karlan & Robert Osei & Isaac Osei-Akoto & Christopher Udry, 2014. "Agricultural Decisions after Relaxing Credit and Risk Constraints," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(2), pages 597-652.
    3. MacMinn, Richard & Richter, Andreas, 2018. "The choice of trigger in an insurance linked security: The mortality risk case," Insurance: Mathematics and Economics, Elsevier, vol. 78(C), pages 174-182.
    4. Jerry R. Skees & J. Roy Black & Barry J. Barnett, 1997. "Designing and Rating an Area Yield Crop Insurance Contract," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 79(2), pages 430-438.
    5. Shawn A. Cole & Wentao Xiong, 2017. "Agricultural Insurance and Economic Development," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 235-262, September.
    6. Shawn Cole & Xavier Gine & Jeremy Tobacman & Petia Topalova & Robert Townsend & James Vickery, 2013. "Barriers to Household Risk Management: Evidence from India," American Economic Journal: Applied Economics, American Economic Association, vol. 5(1), pages 104-135, January.
    7. Nathaniel D. Jensen & Christopher B. Barrett & Andrew G. Mude, 2016. "Index Insurance Quality and Basis Risk: Evidence from Northern Kenya," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 98(5), pages 1450-1469.
    8. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Publications - Reports 8797, The World Bank Group.
    9. Dercon, Stefan & Hill, Ruth Vargas & Clarke, Daniel & Outes-Leon, Ingo & Seyoum Taffesse, Alemayehu, 2014. "Offering rainfall insurance to informal insurance groups: Evidence from a field experiment in Ethiopia," Journal of Development Economics, Elsevier, vol. 106(C), pages 132-143.
    10. Harold G. Halcrow, 1949. "Actuarial Structures for Crop Insurance," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 31(3), pages 418-443.
    11. Justin Gallagher, 2014. "Learning about an Infrequent Event: Evidence from Flood Insurance Take-Up in the United States," American Economic Journal: Applied Economics, American Economic Association, vol. 6(3), pages 206-233, July.
    12. Sommarat Chantarat & Andrew G. Mude & Christopher B. Barrett & Michael R. Carter, 2013. "Designing Index-Based Livestock Insurance for Managing Asset Risk in Northern Kenya," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(1), pages 205-237, March.
    13. Dana A. Kerr, 2006. "Understanding Basis Risk in Insurance Contracts," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 9(1), pages 37-51, March.
    14. Shawn Cole & Daniel Stein & Jeremy Tobacman, 2014. "Dynamics of Demand for Index Insurance: Evidence from a Long-Run Field Experiment," American Economic Review, American Economic Association, vol. 104(5), pages 284-290, May.
    15. Benjamin Collier & Jerry Skees & Barry Barnett, 2009. "Weather Index Insurance and Climate Change: Opportunities and Challenges in Lower Income Countries," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 34(3), pages 401-424, July.
    16. Million Tadesse & Bekele Shiferaw & Olaf Erenstein, 2015. "Weather index insurance for managing drought risk in smallholder agriculture: lessons and policy implications for sub-Saharan Africa," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 3(1), pages 1-21, December.
    17. World Bank, 2005. "Managing Agricultural Production Risk : Innovations in Developing Countries," World Bank Publications - Reports 14434, The World Bank Group.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Angela Zeier Röschmann & Matthias Erny & Joël Wagner, 2022. "On the (future) role of on-demand insurance: market landscape, business model and customer perception," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 47(3), pages 603-642, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lichtenberg, Erik & Iglesias, Eva, 2022. "Index insurance and basis risk: A reconsideration," Journal of Development Economics, Elsevier, vol. 158(C).
    2. Million Tadesse & Bekele Shiferaw & Olaf Erenstein, 2015. "Weather index insurance for managing drought risk in smallholder agriculture: lessons and policy implications for sub-Saharan Africa," Agricultural and Food Economics, Springer;Italian Society of Agricultural Economics (SIDEA), vol. 3(1), pages 1-21, December.
    3. Ayako Matsuda & Takashi Kurosaki, 2017. "Temperature and Rainfall Index Insurance in India," OSIPP Discussion Paper 17E002, Osaka School of International Public Policy, Osaka University.
    4. Takahashi, Kazushi & Noritomo, Yuma & Ikegami, Munenobu & Jensen, Nathaniel D., 2020. "Understanding pastoralists’ dynamic insurance uptake decisions: Evidence from four-year panel data in Ethiopia," Food Policy, Elsevier, vol. 95(C).
    5. Njue, E. & Kirimi, L. & Mathenge, M., 2018. "Uptake of Crop Insurance among Smallholder Farmers: Insights from Maize Producers in Kenya," 2018 Conference, July 28-August 2, 2018, Vancouver, British Columbia 277023, International Association of Agricultural Economists.
    6. Dougherty, John P. & Flatnes, Jon Einar & Gallenstein, Richard A. & Miranda, Mario J. & Sam, Abdoul G., 2020. "Climate change and index insurance demand: Evidence from a framed field experiment in Tanzania," Journal of Economic Behavior & Organization, Elsevier, vol. 175(C), pages 155-184.
    7. Anita Mukherjee & Shawn Cole & Jeremy Tobacman, 2021. "Targeting weather insurance markets," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 88(3), pages 757-784, September.
    8. Selene Perazzini, 2020. "Public-Private Partnership in the Management of Natural Disasters: A Review," Papers 2006.05845, arXiv.org.
    9. Negi, Digvijay S., 2018. "Tail-dependent Rainfall Risk and Demand for Index based Crop Insurance," 2018 Annual Meeting, August 5-7, Washington, D.C. 274481, Agricultural and Applied Economics Association.
    10. Jensen, Nathaniel D. & Mude, Andrew G. & Barrett, Christopher B., 2018. "How basis risk and spatiotemporal adverse selection influence demand for index insurance: Evidence from northern Kenya," Food Policy, Elsevier, vol. 74(C), pages 172-198.
    11. Ceballos, Francisco & Robles, Miguel, 2020. "Demand heterogeneity for index-based insurance: The case for flexible products," Journal of Development Economics, Elsevier, vol. 146(C).
    12. Glenn W. Harrison & Jia Min Ng, 2019. "Behavioral insurance and economic theory: A literature review," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 22(2), pages 133-182, July.
    13. King, Michael & Singh, Anuj Pratap, 2020. "Understanding farmers’ valuation of agricultural insurance: Evidence from Vietnam," Food Policy, Elsevier, vol. 94(C).
    14. Shawn Cole & Xavier Giné & James Vickery, 2017. "How Does Risk Management Influence Production Decisions? Evidence from a Field Experiment," Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 1935-1970.
    15. Shukri Ahmed & Craig McIntosh & Alexandros Sarris, 2020. "The Impact of Commercial Rainfall Index Insurance: Experimental Evidence from Ethiopia," American Journal of Agricultural Economics, John Wiley & Sons, vol. 102(4), pages 1154-1176, August.
    16. Wouter Zant, 2023. "How costly is using livestock as a savings device?," Food Security: The Science, Sociology and Economics of Food Production and Access to Food, Springer;The International Society for Plant Pathology, vol. 15(1), pages 77-110, February.
    17. Antoine Leblois & Philippe Quirion, 2013. "Agricultural insurances based on meteorological indices: realizations, methods and research challenges," Post-Print hal-00656778, HAL.
    18. Matthieu Stigler & David Lobell, 2021. "Optimal index insurance and basis risk decomposition: an application to Kenya," Papers 2111.08601, arXiv.org, revised Mar 2023.
    19. Aditya Kusuma & Bethanna Jackson & Ilan Noy, 2018. "A viable and cost-effective weather index insurance for rice in Indonesia," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 43(2), pages 186-218, September.
    20. Erwin Bulte & Rein Haagsma, 2021. "The Welfare Effects of Index-Based Livestock Insurance: Livestock Herding on Communal Lands," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 78(4), pages 587-613, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:rmgtin:v:23:y:2020:i:2:p:121-150. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=1098-1616 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.