Parametric Insurance: an innovative solution to protect the agricultural sector

New agriculture faces increasingly complex challenges due to climate change, weather variability, and market fluctuations. In this scenario, parametric insurance emerges as an innovative solution to protect the agricultural sector against climate risks and adverse events more efficiently than traditional insurance.
Parametric insurance insures against the occurrence of an event, rather than actual damage, using a predetermined index (or set of indexes) agreed upon between the insurer and the insured. The respective values ​​present a "threshold" that, once reached/exceeded, entitles them to compensation that can progressively increase until reaching the maximum compensation limit stipulated in the policy. This index, or indexes, must be correlated with the cause of the event and measurable using publicly available and third-party information. It will be modeled using large amounts of data—"Big Data"—and artificial intelligence algorithms. This approach is particularly beneficial for new agriculture, which increasingly relies on data for decision-making and risk management. Using sensors, satellite imagery, and artificial intelligence, farmers can integrate parametric insurance into their strategic plans, minimizing financial and operational impacts in the event of extreme weather events such as droughts, frosts, or severe storms. In addition to the speed of compensation payments, another benefit of this type of insurance is the reduction of administrative and operational costs, making insurance more accessible and attractive for small and medium-sized producers.
In this way, parametric insurance increases the resilience of the agricultural sector and contributes to global food security, as it allows farmers greater financial predictability and resilience in the face of adversity. With the development of digital agriculture, parametric insurance will become increasingly common, strengthening the sustainability of the sector. Their potential to adapt to the needs of different crops and regions makes them an essential tool for addressing climate challenges and ensuring more stable and secure agricultural production.

Nuno Rodrigues
MDS Portugal
Property & Casualty Director