Following the rollout of Lagos State’s $7.5 million parametric flood insurance scheme, which is designed to deliver rapid post-disaster funding to millions of vulnerable residents, fresh insight is emerging on the technology powering the model’s trigger system.
In this interview, Mike Bennett, head of Government Solutions, North America at ICEYE, a space technology company providing global satellite monitoring solutions through advanced synthetic aperture radar (SAR) imaging, speaks with Business a.m’s Joy Agwunobi on how satellite-based flood observation is redefining how payouts are activated, reducing delays associated with traditional claims processes, and shaping the case for wider adoption of parametric insurance in high-risk, low-coverage markets like Nigeria. Excerpts:
How exactly does the parametric flood insurance model work in the Lagos context, and what specific flood conditions trigger payouts?
In Lagos, the parametric flood insurance model is being run through local insurers and LASEMA (Lagos State Emergency Management Agency). The model is meant to pay out if a significant flood event impacts the underserved population – a macroinsurance cover meant for an area with traditionally very low insurance uptake.
What role does ICEYE’s SAR satellite data play in verifying these conditions, and how quickly can payouts realistically be activated once a trigger is met?
Traditionally, flood parametric insurance was triggered by proxies such as river gauges, rain sensors, or satellite rainfall data. However, this left basis risk high and delivered largely unsatisfactory results. ICEYE provides observational data – true flood data rather than proxy-driven analyses – meant to better correlate with loss-causing events and drive down the basis risk. Realistically, payouts could be delivered in a matter of weeks as opposed to months or even years in a traditional indemnity-based insurance scheme.
For a non-technical audience, how does SAR satellite data differ from traditional flood monitoring methods, and why is it particularly effective in flood scenarios?
SAR data can see through clouds and at night, offering a glimpse into disasters as they’re occurring. Rather than wait for the skies to clear or the sun to come out, SAR satellite data allows us to see what conditions are like close to peak flooding, which means we can shift from modelled validation to observational validation.
What level of accuracy does the data provide, and are there any limitations or risks of false triggers or missed events?
No data set is perfect, and we wouldn’t argue that SAR is a panacea. However, when indemnity-based insurance for flooding takes months or years to resolve – and historically flood parametric transactions utilize proxies rather than true observations – ICEYE helps to bridge the basis risk gap while significantly bringing down the time to resolution.
The policy is expected to cover up to 4 million people—how will affected individuals or communities receive payouts in practical terms?
A contingency plan was created for this transaction by the UNDP and African Risk Capacity (ARC), in consultation with AXA Climate. This report details how the flexibility of a parametric macroinsurance cover for Lagos State can be used for emergency response, temporary shelters, water access, health kit distribution, nutritional feeding, and even a small element of cash payments. ICEYE’s role here, aside from a trigger on the transaction itself, is to enhance the response capability of LASEMA in a targeted fashion to the most impacted areas.
How fast can funds reach affected communities compared to traditional insurance models?
Traditional insurance models could take months or years for communities to receive assistance; this transaction drops that time to less than a month.
Nigeria has historically struggled with low insurance penetration. What makes parametric insurance more suitable for this market, and what challenges could still limit adoption?
Rather than try to sign up individuals for an insurance product, the idea behind this transaction is that it covers 4 million individuals under one policy – a form of macroinsurance. It essentially recognizes the challenges and limitations of traditional insurance in a region like Lagos, and moves to a higher-level view that the government can take on more of the risk than the individual.
How do you address situations where flood damage occurs but predefined trigger thresholds are not met?
Emergency management agencies worldwide, such as LASEMA, are designed to handle everyday disasters within their normal budget. Disaster financing through frameworks like this parametric transaction is not meant to bypass or even supplement that capability. This transaction is meant for the most severe and catastrophic flood events, and specifically for underserved communities. This allows LASEMA to focus its efforts on emergency management without having to worry about whether a particular event is going to cause significant financial strain for them.
Additionally, parametric insurance has two distinct advantages over indemnity-based insurance: speed and flexibility. Traditionally, that has come at the cost of an increasing basis risk, but when you tie the trigger directly to the observations of an event (which is what ICEYE is providing in this case), you are decreasing that basis risk and bringing it closer to the true losses.
Parametric insurance is not meant to be a replacement for traditional insurance – the two can co-exist in a hybrid fashion. But in areas of extremely low traditional insurance penetration rates, parametric insurance can help to close the coverage gap in a quicker and easier fashion without having to educate an entire market on the benefits to hazard insurance.
Do you see this model being replicated in other states or markets, and what conditions are necessary for it to scale?
Floods are everywhere, and it’s a growing risk, whether that’s in areas like the US or Europe, or in developing nations. The common ground across all geographies and economies is that it hasn’t traditionally been modelled well compared to primary perils, which lends itself well to parametric insurance. People need to be educated on what parametric insurance is, and that includes the individual households as well as the government agencies in charge of disaster risk financing. This helps to move from a donor-based system to a sustainable, government-sponsored program.
Who ultimately bears the financial risk in this model, is it the government, insurers, or reinsurers, and how sustainable is it in the long term?
In a sustainable model, we move from a donor-sponsored project to having parametric insurance just be another tool in an agency’s toolbox – essentially, the only way to have long-term sustainability for flood insurance at the local, state, or federal level is to have it as a budget item. Governments need to shift from expecting donor capital to fund their disasters to a model where they budget for worst-case scenarios. Therefore, the sustainability of parametric insurance is dependent on the willingness of governments to spend money in advance of a disaster to save larger amounts of money post-disaster.
