Risk Assessment

Damage Control: Parametric Insurance - An Emerging Tool for Financial Risk Management

Local governments have a duty to respond quickly and decisively to extreme events and provide continuity in critical public service through adverse circumstances. Reserves or “rainy day funds,” federal assistance, and indemnity-based insurance programs are the primary tools governments have used to manage risk associated with events, such as natural disasters, recessions, etc., that have the potential to disrupt public services.In recent years, a type of insurance instrument called “parametric insurance” has generated interest in local governments in North America to help fulfill risk management needs that aren’t met by indemnity-based insurance, federal assistance, or rainy day funds. Parametric insurance is not new—it has been around for over 20 years. It has been used to protect Caribbean nations against natural disasters and insure energy companies against disruption to their revenue stream due to unusually cold summers or warm winters, for example. For state and local governments, parametric insurance can provide resources to cover damages not covered by federal assistance or indemnity insurance or that go beyond what a government’s reserves can cover.

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