Parametric flood insurance
Cover that pays a preagreed amount when a flood index (water depth at a sensor, river gauge level, satellite-mapped flood extent, rainfall total) crosses a threshold, with no loss adjustment.
Parametric flood insurance is cover that pays a preagreed amount when a flood index crosses a threshold, with no loss adjustment. Twelve inches of water read by a sensor bolted to a warehouse wall, and the claim pays: that is parametric flood cover at its tightest. The index can also be the stage at a river gauge or flood extent mapped by radar satellite. Other contracts read a 24- or 72-hour rainfall total, or a flood footprint computed by a hydraulic model from observed river flows. The contract names the data source, the measurement point, the time window and a step payout schedule (so much at one foot, so much at two, full limit at three). Flood is the peril where basis risk bites hardest. Two neighboring streets take different water, a levee fails downstream of the gauge, surface water in a city never touches a river. And cloud cover blinds optical satellites at the peak, which is why the market leans on synthetic aperture radar. The closer the index sits to the asset, the lower the basis risk, and the more the structure costs in sensors, maintenance and potential disputes: a sensor ripped off, moved, or out of battery. Contracts therefore carry a fallback source and an independent calculation agent. Sovereigns tend to buy broad indices. The excess rainfall product of CCRIF (the Caribbean Catastrophe Risk Insurance Facility) starts from rainfall over the country estimated by satellite and by weather model runs. The satellite estimates come from CMORPH, published by the National Oceanic and Atmospheric Administration (NOAA), and from IMERG, published by NASA, the U.S. space agency. The product computes the payout from a modeled loss without ever looking at a single house. On the corporate side, parametric flood is usually bought alongside a property program that excludes or sublimits flood, or to fund the deductible, business interruption and emergency costs that indemnity cover reimburses months later. In France, the CatNat (natural catastrophe) regime already pays direct damage to insured property once a disaster order is published; an index leaves that untouched and pays for cash in the first days.
Textbook case, made-up numbers: a riverside distribution center buys a 2 million euro parametric limit. The sensor on the loading dock pays 25% of limit at 8 inches of water, 50% at 16 inches and 100% at 32 inches. One January night the water reaches 18 inches for six hours, and 1 million euros is paid within the week on the sensor reading alone. Adjustment of the flooded stock runs its course under the property policy, which will pay the documented loss above its deductible months later.
parametric flood insurance, parametric flood cover, flood index insurance, index-based flood insurance
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