Basis Risk and the Adoption of Parametric Insurance among Italian SMEs: Empirical Evidence and Implications for Resilience

Italian SMEs are exposed to natural disasters. However, the adoption of innovative insurance solutions aimed at mitigating these risks and improving both individual and systemic resilience—such as parametric or index-based insurance—remains limited. This paper explores the factors that influence Italian SMEs in adopting these policies, with a particular focus on the role of basis risk, which is the mismatch between pay-outs and actual losses. Using a logit model estimated on a stratified random sample of 362 Italian SMEs, structural, behavioural, and contextual variables are combined through the integration of secondary data and responses to a specially designed questionnaire. The results show that basis risk remains a major concern but can be mitigated through targeted information programmes, as well as technological and regulatory measures. Along with this, factors like the level of losses suffered by SMEs in the recent past, the size and level of digitalisation of the firms, and whether they received adequate information about this type of policy appears to affect the propensity to purchase parametric insurance too. These insights are valuable for policymakers, insurers, and stakeholders involved in insurance innovation, emphasizing the importance of effective communication and contractual solutions.