Many victims of last month's floods in Australia had no insurance whatsoever, and the assessment of damage was agonisingly slow.
Secondary perils, such as flood, are a global trend in the insurance industry, characterized by localized, sudden and intense weather events.
Climate change has resulted in Australia being increasingly vulnerable to extreme weather conditions. This in turn exposes the country to financial risk and we need therefore seriously think about how to manage the financial risk of a secondary peril.
Weather index insurance is a new form of insurance that uses automatic payments to make it easier for both victims and insurers. It has been deployed in remote parts as Paraguay and Mongolia — and could work here too.
After an event, insurance companies assess damage and how the money will be distributed. This often requires victims to accurately record everything they experienced so they can make a claim. The sheer number of people who experience these events can lead to long wait times while they wait to receive their funds.
But weather index insurance, sometimes just called weather insurance, is paid when an index is reached. For example, if a certain flood level has been passed or if rainfall reaches a low point.
Insurance against fluctuating weather conditions has been trialled by farmers in remote parts of developing countries to insure crops, although it is yet to be tried on property insurance.
It's hard for insurance assessors to make the long trip out to the steppes of Mongolia or floodplains of Bangladesh to assess damages from extreme weather, but advances in remote sensing and satellite technology can help determine whether or not extreme weather has occurred.
The payouts for Weather Index Insurance are automatic and fast. When a weather event is recorded, farmers receive their money even if the crop remains unharmed. This gives the farmer an incentive to make the best decisions when it comes to ensuring that his crops survive with little damage.
Weather insurance is a kind of crop insurance that helps farmers in remote areas. The weather index is linked to specific crops and their growing conditions. This way, the weather company can predict the level of losses.
Weather index insurance has shown promise in global trials and been found viable by Australian researchers. While it is not yet widely adopted, a number of farmers have recently taken up the option.
Australian insurance providers like CelsiusPro, for example, has worked with the World Bank and other aid organisations to bring weather policies to communities in the Pacific.