Warren Buffets, the chairperson and CEO of Berkshire Hathaway, a famous American investor and philanthropist nicknamed the “oracle of Omaha”, is considered one of the most successful investors of all time. In his 2025 shareholder letter, Warren Buffett acknowledged the potential for “a truly staggering insurance loss” due to climate change, stating that such events could occur “someday, any day,” and that there is no guarantee there will be only one per year. Buffett noted that insurance pricing increased broadly during 2024, reflecting a major increase in damage from storms and droughts.[1]

According to a study published last year by the Potsdam Institute for Climate Impact Research (PIK) in the industry journal Nature, climate disasters could cost the global economy a whopping $38 trillion per year by the middle of this century. That would be a massive 90-fold increase from the estimated $417 billion in estimated economic losses the world experienced last year from natural catastrophes. [2]
“The rising frequency and severity of extreme weather are driving greater losses, leading insurers to raise premiums and narrow coverage.”

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Economic and Market Impacts

Insurance availability collapse: Collapse of insurance availability: Weather-vulnerable regions in the US are already facing the withdrawal of coverage. By 2030, premium increases could be 50% making coverage out of reach for a large proportion of homeowners.

Mortgage market paralysis: Banks require insurance for loans. Insurer failures could freeze housing markets in high-risk areas, triggering $1.2 trillion in devalued coastal properties by 2030

The World Economic Forum writes, in February 2025: “What are insurance deserts, and what are their implications for businesses and people? An insurance desert is a high-risk region where insurers either heavily reduce or stop offering coverage. In these regions, protections against risks from climate change will rise by 50% by 2023, or in other case premiums will be withdrawn. In the United States, this applies to parts of Florida and California, among other. [3] Reduction in coverage leads to scuttling mortgage access and undermining economic growth.

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A possible answer to these threats in the field of coverage would be  the “Parametric insurance”.

This recent parametric insurance concept offers innovative options to protect regions and clients facing extreme event risks by linking payouts to measurable weather parameters instead of traditional loss assessments. They involve activation of parametric policies with predefined payments when target thresholds are reached (e.g., 10 consecutive days above 40°C in a region). Unlike traditional insurance that requires damage verification, payouts are automatically triggered through (for example):

• • Temperature indices from trusted weather stations and Satellite heat mapping data
• • Mortality/hospitalization rates that are clearly tied to heatwaves.
• • If a category 5 tropical cyclone occurs in a defined geographic area, or in the event of a 7.0 magnitude earthquake.

Fundamentally, parametric (or index-based) solutions are a type of insurance that covers the probability (or likelihood) of a loss-causing event happening (like wildfires) instead of indemnifying the actual loss incurred from the event.  Any parameter or index that is used as the basis for a parametric solution must be objective, transparent, and readily available. [4]

Traditional insurance and parametric insurances will play complementary roles in an insured’s overall risk management strategy.  While traditional insurances compensate actual losses, parametric insurances would provide coverage for the occurrence of potentially catastrophic events. [5]

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Parametric insurance in the world

In Commonwealth countries, island nations severely threatened by climate change advocate parametric insurance solutions:

“This type of insurance offers fast, transparent and predictable payouts after significant shocks. It therefore minimizes the financial impacts of such disasters, including weather-related or cataclysmic events, often reducing or eliminating the need to borrow. Parametric insurance is ideal for providing immediate financial assistance to vulnerable communities after weather-related disasters. This allows for a faster return to normalcy.” [6]  Commonwealth institutions help vulnerable developing countries in determining what product mix would suit their needs, including index insurance products.

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An example of parametric insurance already in operation is the Caribbean Catastrophe Risk Insurance Facility (CCRIF).

Established in 2007, CCRIF allows its member countries to purchase parametric insurance policies, which pay out based on predefined conditions (such as the intensity of a hurricane or earthquake) instead of traditional indemnity insurance, which requires proof of loss. As an example of payouts, Barbados received $29 million from CCRIF after Hurricane Elsa (2021), based on storm intensity and modeled losses.
In Europe and Latin America, with regulatory adaptations outpacing major tax overhauls, parametric insurances are evolving rapidly.

In Europe, the financial market authority (FMA) refers to parametric insurance as “a type of insurance covering the occurrence of a pre-defined external event, instead of indemnifying the actual losses incurred by the policyholder.” They allow for a quicker distribution of funds and are more suitable for immediate relief (also in case of pandemic). [7] To date, the classification of these products is still uncertain. While they make it easier to insure against natural catastrophes or cyberattacks, their legal classification remains unclear.

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In Latin America, countries like Honduras, El Salvador, and Colombia have authorized the commercialization of parametric insurance products. Colombia did so in its National Development Plan of 2023, and there are hopes that these products may protect farmers from the consequences of crop failures. [8] While the costs of subscribing such a product for protecting crops may be less than $10/month in a country like Colombia, the “awareness gap”- limited understanding of the project, and lack of regulatory clarification slow down the spread of these coverages.  The Swiss Re group has recently produced a guide to parametric insurance, which can be consulted below. [9]

The tax treatment of parametric payments:
In terms of tax treatment, this evolution in insurance coverage creates new challenges:[10] Unlike traditional insurance, which is linked to actual losses, parametric insurance pays out based on predefined events (e.g., a hurricane of a certain magnitude). This raises questions as to whether these payments can be considered insurance or financial derivatives for tax purposes. In some jurisdictions, they risk being taxed as income rather than as compensation, which could increase the tax burden on beneficiaries.  For example, in the United States, the New York Parametric Insurance Act explicitly defines parametric products as complementary to traditional insurance, but the tax treatment may still vary depending on state and federal regulations. [11]

At least three aspects appear in the tax treatment of parametric payments:

Deductibility of premiums and deductions for companies and individuals: the deductibility of premiums paid for parametric insurance depends on whether these policies are classified as insurance contracts. If they are reclassified as financial instruments, premiums may not be deductible in certain jurisdictions. There are also variations at the global level. For example, in Europe and Latin America, regulatory frameworks are evolving, but tax codes have not always been adjusted. Countries such as Colombia have authorized parametric products but still face gaps in aligning tax laws with these innovations.

Incentives for risk mitigation: Governments can offer tax incentives to encourage the adoption of parametric insurance in high-risk areas. For example: Subsidies or premium credits in catastrophe-prone regions, or tax exemptions for insurers offering parametric products to underserved markets, such as small farmers in developing countries.

Impact on government revenues: Reduction in premium taxes: As insurers move from traditional policies to parametric models, states that rely on premium taxes may see their revenues decline. Parametric policies typically have lower premiums due to their streamlined structure and reduced administrative costs.

Parametric insurance has become a critical tool for addressing weather-related risks, offering quick payouts based on objective triggers. While this innovation is gaining traction, its legal and fiscal implications vary by jurisdiction, requiring specific adjustments.

In conclusion, parametric insurance is a necessary innovation for the insurance industry’s climate response, as it can offer speed, scalability and access to underserved markets.  However, its effectiveness depends on addressing the basis risk through improved modeling, harmonization of regulatory frameworks, and its integration with traditional insurance and public adaptation initiatives.

Tax administrations and insurance companies would have to coordinate on:

• • Tax frameworks: Countries should adapt their tax legislation to evolving insurance models to avoid misclassifications and ensure fair treatment of premiums and parametric payments
• • Incentives: Introduce specific tax incentives for both insurers and policyholders to expand access to parametric products in underserved regions.
• • Monitor revenue implications: Assess how changes to parametric systems affect premium tax revenues and explore alternative funding mechanisms.

Parametric insurance represents a transformative response to climate risks, but its legal and fiscal implications require careful management to maximize its benefits while minimizing unintended consequences for governments and taxpayers around the world.

As climate volatility intensifies, parametric solutions will increasingly serve as the first line of defense. Systemic resilience requires a multi-layered approach that combines risk transfer, mitigation and infrastructure investment.

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[1] https://global.insure-our-future.com/insurance-crisis-decarb-resilience/

[2] https://www.weforum.org/stories/2025/02/insurance-deserts-climate-urbanization-risk/

[3] https://corporatesolutions.swissre.com/insights/knowledge/what_is_parametric_insurance.html

[4] https://earth.org/financial-storm-how-escalating-climate-events-are-reshaping-the-insurance-market/

[5] https://www.ccrif.org/?language_content_entity=en

[6] https://www.bpbcpa.com/tax-treatment-of-casualty-losses-and-casualty-gains-from-hurricanes-ian-fiona-by-arthur-j-lieberman/

[7] https://www.jdsupra.com/legalnews/new-york-enacts-parametric-insurance-1246663/

[8] https://thecommonwealth.org/news/blog-how-parametric-insurance-can-support-improved-climate-resilience-commonwealth

[9] https://www.schoenherr.eu/content/parametric-insurance-a-newcomer-but-no-longer-a-niche-product

[10] https://commercial.allianz.com/news-and-insights/expert-risk-articles/climate-change-parametric-insurance-solution.html 

[11] 2023-01-corso-guide-of-parametric-insurance.pdf

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