Parametric Indices for Excess Rainfall and Drought – Pacific Rapid-Response Financing

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In 2017, Pacific Island Countries (PICs) made a request to the World Bank to investigate the potential development of a rainfall product that would provide governments insurance against both excess rainfall and drought. PICs are exposed to significant damage and disruption from these perils, which is expected to increase with the impacts of climate change. 

Catastrophic rainfall and drought events represent a coverage gap within the financial protection instruments that are available to PICs .  The Pacific Catastrophe Risk Insurance Company (PCIRC) offers governments coverage against earthquakes, tsunamis and tropical cyclones, but currently does not provide insurance policies for drought, or excess rainfall, arising from weather systems such as tropical depressions or convective storms.

To investigate the viability of expanding PCRICs insurance coverage the World Bank commissioned a technical consortium led by DHI to conduct a pre-feasibility study outlining options for a rainfall insurance product that can provide parametric insurance for both excess rainfall and drought impacts. Five countries were chosen for the study given recent experiences with excess rainfall and drought, namely: Fiji, the Marshall Islands, Palau, the Solomon Islands and Tuvalu.  The study focused on the development of ‘parametric’ indices that use rainfall data to indicate the severity of a hazard event, and thereby  defining a trigger or set indicator for a potential payout to the policyholder, or government.