Parametric insurance for extreme heat: protecting people in a warming world

Why heat matters now more than ever

In late June, over 170 million Americans sweltered under a massive heatwave. Outdoor workers laboured through the stifling temperatures, trains were slowed or cancelled, and a viral video circulated of a road in Cape Girardeau, Missouri buckling just as a car drove over it. This follows heat waves in South Sudan, the United Kingdom, India, and Pakistan, and all signs point toward a continuing trend of record-breaking heat across the globe. Scientists at the UK Met Office estimate that as soon as 2029, the planet could exceed a 2 °C increase in average temperatures above pre-industrial temperatures. This soars past the symbolic target set in the Paris Agreement in 2015, and much sooner than many have feared.

The global rise in average temperatures is already changing the way we live. With over 4.4 billion people living in cities that already can be hotter to start with, due to the urban heat island effect, these impacts are especially concerning. Subways become dangerously hot due to crowding, insufficient ventilation and faulty or non-existent air conditioning. Hospitals see increased patient volume as people suffer from heat illnesses, exacerbating peoples’ existing health conditions and also causing longer wait times for non-heat-related conditions. Heatwaves inhibit residents’ ability to move, work, and live safely across cities.

It is only in recent years that researchers have begun to fully identify and quantify the costs of these heat-related impacts, especially to the low-income communities that often bear the brunt.

While most responses to extreme heat have focused on the built environment, improved operations, preventative maintenance, and public programs, there are not always the timely resources available to finance these activities. Parametric insurance and other innovative financial instruments, like catastrophe bonds, can be structured to provide local governments, non-profits, and relief organisations with the resources needed to save lives and keep people safe during heatwaves.

Parametric insurance transforms heatwave response

Parametric insurance is designed to pay out quickly as soon as a pre-defined threshold is met. There is no lengthy claims process with its associated uncertainty and delays. Instead, a parametric insurance policy relies on an agreed-upon trigger. When applied to a climate context, this can mean that payment is triggered when winds hit a certain speed or temperatures reach 40 °C. The trigger is selected based upon the community’s past experience, to ensure that it doesn’t pay out when not needed. This can also ensure that resources are delivered quickly to speed recovery and stabilise the affected population. The assurance of this payout can also enable cities to deploy more resources quickly on the day of the event.

There is a growing opportunity to expand the use of parametric insurance to help cities manage the worst impacts of heat. In Ahmedabad, India in 2023, the Atlantic Council’s Climate Resilience Center partnered with the Self-Employed Women’s Association (SEWA) and Blue Marble to test the world’s first parametric insurance for extreme heat. The product covered income losses due to extreme heat for women working in the informal sector. Due to persisting gender wage gaps and limited access to land ownership compared to men, women often must make the difficult choice to continue working through life-threatening heat waves, risking their health to sustain their livelihoods. 

The first phase of the insurance covered 21,000 SEWA members. It was designed to pay out when predetermined temperature thresholds were met. Notably, these thresholds changed throughout the course of the summer to account for abnormally extreme heat events. The insurance was paired with the distribution of resilience assets to each SEWA member, ranging from water coolers to tarps and solar lamps. The pilot was renewed in April 2025 and expanded to include coverage for extreme rainfall to account for the monsoon season that directly follows the hottest period of the summer.

Challenges to scaling parametric insurance

Despite the opportunities of parametric insurance, there are also clear barriers and challenges. One of the central challenges is sustained funding. As these pilots emerge, there is a strong reliance on philanthropic support given the lack of an established market for parametric heat insurance. It may also indicate a lack of certainty within both the public and private sectors that these unfamiliar products are worthwhile investments. However, as the evidence base for parametric insurance for wind, flood and heat grow, investor confidence can ensure longer-term sustainability. Another challenge is the under-quantification of heat risk and impacts, particularly in the Global South, which makes it difficult for governments and companies to assess whether an investment in parametric insurance is worth the cost. Despite a growing body of literature on heat, labour productivity and healthcare expenditures, research uncovering the costs of heat to business continuity and household expenditures on adaptation remains limited. 

Finally, the products in these case studies covered relatively small geographic areas. In practice, if the heat wave risk is particularly high in a given year, premiums may rise accordingly, placing a greater financial burden on a single payer. A stronger model could pool risk -- and associated costs -- across multiple geographies. By finding new ways to pool and share costs, coverage can be more beneficial for policyholders and insurance companies.

Insurance is just one part of the puzzle

No single effort can protect against the varied impacts of extreme heat. Parametric insurance for heat, similar to parametric for flood and hurricanes, shows promise as a method of transferring risk of extreme events. Local and state governments should invest in continuing to test insurance for heat in tandem with both risk reduction measures and other financial mechanisms – cash transfers, loans which may be offered on more favourable terms if cities have insurance in place – to understand the costs and benefits of these arrangements in a highly uncertain climate. In parallel, regional risk pools and national governments should evaluate the potential benefits and costs of expanding insurance coverage across wider geographies.

Preparing for a hotter future

As life-threatening heatwaves become an annual occurrence rather than a freak event, cities need an expanded toolbox for protecting their economies and residents. As tried and true solutions – nature-based solutions, cool roofs, and at-home wellness checks – are deployed, innovative approaches like parametric insurance will increasingly become essential to complement existing efforts and save lives.

Peter Adams, Associate Director, Climate Risk and Resilience, Howden 

Owen Gow, Deputy Director of Extreme Heat Initiatives, Atlantic Council’s Climate Resilience Center