Ins. for risk management is not the solution it seems to be for developing nations: African countries — that contribute the least to climate change but lose 15% GDP per capita to climate shocks annually— are increasingly turning to parametric ins. to manage the financial risks of climate-related disasters, but the benefits are proving to be limited, Bloomberg reports.

Why is this the case? Most ins. schemes supporting the developing nations are parametric, meaning that payouts are pre-determined and are only triggered after specific criteria are met rather than a compensation released based on the sustained damage assessment. While the approach can provide faster relief, and compensate for slow funding, it also means no payouts if the cutout is missed by a hair or low payouts despite major damages in some cases. For nations unable to access international lending markets due to their debt burdens, such as Zimbabwe and Zambia, parametric ins. is sometimes the only option and appears as a lifeline despite its drawbacks.

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More on the drawbacks: While the ins. may seem useful at face value, it also presents some problems, such as being based on how much the policymaker can afford rather than on the assessed damages. Malawi, for example, experienced severe enough drought to trigger the policy but only a few villages benefitted from the population of 20 mn. Large-scale losses are rarely addressed through this model, and there is a misalignment between the triggers for ins. and the actual losses.

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