Under the combined impacts of climate change and urbanization, flood disasters have exhibited increasing non-stationarity, low-frequency but high-impact characteristics, and enhanced spatial dependence. Traditional indemnity-based flood insurance has certain limitations in claim efficiency and loss assessment. In contrast, index-based flood insurance, characterized by objective triggering mechanisms, rapid claim settlement, and low operational costs, has gradually become an important tool for flood catastrophe risk management. Based on a literature review approach, this study systematically reviews the index system, pricing mechanisms, and basis risk of index-based flood insurance, and provides a comprehensive analysis from the perspectives of index construction, threshold determination, and payout design. The results indicate that index systems have evolved from single hazard indicators to coupled indices integrating hazard characteristics and loss information, and multiple pricing approaches have been developed, including fixed, linear, piecewise payout, and probabilistic payout schemes (payouts determined by loss probabilities rather than fixed thresholds). Among the reviewed approaches, inundation-area-based indices generally show stronger consistency with actual losses at urban scales, whereas precipitation-based indices are more suitable for large-scale regional applications due to their rapid triggering capability. However, basis risk remains a critical issue, mainly arising from index errors, spatial scale mismatches, and inappropriate threshold settings. Therefore, to address the identified limitations of basis risk, threshold uncertainty, and spatial mismatches, future research should focus on multi-dimensional risk indices, dynamic threshold setting, and optimized spatial risk zoning, as well as the integration of remote sensing and machine learning methods to improve the consistency between indices and actual losses. The findings provide practical guidance for insurers in product design, for policymakers in regional flood risk financing, and for disaster managers in improving climate adaptation strategies.
Zhou et al. (Mon,) studied this question.