01 December 2017

IAIS Consultation on its draft issues paper on index-based insurances

Index-based insurance is increasingly looked at as a means to manage weather and catastrophic events, support food security and enhance access to insurance. The proposed Issues Paper provides background on this product, describes practices and actual examples and identifies related regulatory and supervisory issues and challenges.

The Financial Inclusion Working Group (FIWG) has - through a drafting group – developed a draft Issues Paper on Index-based Insurances.

Index based insurance is a relatively new, innovative, and increasingly popular approach to insurance provision. The product involves contracts where a claim is defined with reference to a pre-determined index (sometimes also referred to as parametric insurance).

This paper focusses on the insurances usually directed at weather related or natural catastrophe event risks. These insurances sometimes focus on agriculture and other times on protection from natural catastrophes. There have also been cases where the index is focused on other measures, for example intended as a proxy to risks such as political instability or economic adversity. Similar products may also be targeted at catastrophic health or life insurance covers such as pandemics.

The paper does not exclude those innovations from the scope. However, the paper does not address products where the index is solely a function of capital markets, asset prices or other economic measures, or where payouts are determined by the value of underlying assets in an investment portfolio, nor does it address products that are based on an index related to mortality rates particularly directed at long term longevity risk.

Often, the index seeks to reflect losses arising from weather and catastrophic events, attracted by the opportunity to avoid the cost and administrative delay from traditional services of insurance claims assessors. These features provide the promise of significantly reducing underwriting and claim assessment costs. They also allow for the claims settlement process to be quicker and more objective. The combination of these elements has encouraged efforts to reduce the barriers to providing effective and affordable insurance, particularly for lower income groups that tend to be more vulnerable to such events. Improved access to insurance can directly and indirectly enhance livelihoods, reduce poverty and create opportunities for economic advancement. Regarding agriculture in particular, the provision of effective insurance is also seen as a way to facilitate a more productive agricultural sector.

Feedback on this draft paper is invited by 29 January 2018.

Full information

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