Review of Index Insurance from Legal & Regulatory Perspectives and Recommendations for Best Practices

This paper discusses the characteristics, potential for development, and the legal and regulatory aspects of parametric insurance. With the increasing risks posed by natural disasters and climate change, traditional insurance products often fail to provide adequate coverage, which has led to growing attention on parametric insurance as a new risk management tool. Parametric insurance compensates losses based on predefined indices derived from weather data, and it plays a crucial role in addressing the protection gap, particularly in Africa and developing countries, where natural disasters are often not sufficiently covered by conventional insurance. This paper analyzes the background of parametric insurance development, technological advancements, and the legal and regulatory challenges it faces, while highlighting the potential for innovation within the insurance industry. It also emphasizes the need to resolve legal and technical issues—particularly “basis risk” and the existence of insurable interest—for parametric insurance to firmly establish itself as a distinct financial product from traditional insurance. Finally, the paper suggests that the successful expansion and implementation of parametric insurance will require a regulatory sandbox approach involving collaboration among various experts. Moreover, a thorough consideration of parametric insurance from a regulatory and legal perspective is necessary for a smooth introduction and transition, ensuring that it evolves into a safe and reliable financial product.