Insuring Against Extreme Heat Navigating Risks in a Warming World 2025

Though parametric insurance presents many benefits, it has limits. By covering only specific thresholds or trigger events, it leaves out damages that fall outside the defined parameters, exposing policyholders to economic impacts below the trigger level. For instance, a parametric policy for crop loss due to drought may be designed to pay out if cumulative rainfall during the risk period (May to July) falls below 50 mm. However, if an agricultural business or cooperative experiences significant disruptions with 55 mm of rainfall, they would not receive any compensation, as the pre- defined threshold was not met. Parametric products may also risk becoming financially unsustainable as rising climate risks could lead to more frequent payouts.42 Finally, there remains a lack of awareness of the potential benefits of parametric solutions. Business leaders would benefit from greater education on topics such as parametric indices, the definition of triggers and forecasts used in underwriting, and the connection between these products and the economic impacts of extreme weather events. Despite limitations, parametric products will continue to play a role in addressing extreme heat and building climate resilience in vulnerable communities going forward. Insurers are increasingly using new technologies for risk management and climate resilience. Artificial intelligence (AI) for extreme weather event prediction, geospatial data for hazard mapping and machine learning for strengthening risk models are all allowing the industry to predict and mitigate climate disasters more effectively. Traditional climate risk evaluation methods face significant challenges in the face of evolving climate threats. For example, wildfire risk modelling may not fully capture the complex interactions between increasingly frequent and intense wildfire risk drivers – such as extreme heat – and the escalating intensity of extreme fire behaviour.43 Complex perils, such as wildfires and floods, rely heavily on simulating intricate, fine-scale physical interactions, which poses challenges for traditional models. Modern probabilistic models stand to benefit from emerging technologies that can capture subtle, hard-to-detect relationships essential 3.2 New tech for risk insights Blue Marble, an innovative insuretech provider, partnered with Nestlé to launch a parametric insurance product that financially protects smallholder coffee farmers in Indonesia from increasingly volatile weather conditions such as drought and excessive rainfall. This product uses satellite-based climate data to monitor disruptions in coffee production, with automatic payouts issued to registered farmers impacted by these climate events. Through this protection, vulnerable coffee farmers gain access to critical insurance coverage, helping them build resilience and adapt to climate risks. This project is one of many examples where Blue Marble has developed tailored parametric insurance solutions to address specific needs across various markets and commodity value chains.CASE STUDY 5 Coffee farmer parametric insurance in Indonesia Pioneered by Swiss Re, this parametric insurance solution was designed to protect Singaporean businesses facing financial disruption due to severe haze caused by wildfires in Indonesia. HazeShield uses a haze pollutant index and private and government data to create a parametric policy with incremental payouts based on fire activity, weather patterns and number of days of health-threatening particle pollution. This product can provide invaluable protection against business interruption for losses stemming from reduced productivity, suspended operations for outdoor workers, event cancellation and slowdowns in tourism. If applied to heat-related risks, this product model is a useful precedent for further parametric innovation.CASE STUDY 6 HazeShield Insuring Against Extreme Heat: Navigating Risks in a Warming World 15