Given South Asia’s reputation as the world’s most ‘climate-vulnerable zone’, India could consider parametric products
The warmest year on record was 2023.
A report estimated that losses from natural disasters amounted to $280 billion in 2023, of which only about $100 billion was insured.
The gap in insurance coverage
was particularly wide between developed and developing economies.
With the world experiencing a surge in extreme weather events, the insurance industry needs to enhance disaster resilience by devising a number of alternative methods of coverage.
indemnity-based insurance products
At present, the globally accepted method of disaster risk reduction is to transfer risk through indemnity-based insurance products, which require physical assessment of damage for payouts.
it becomes difficult to verify the losses
When calamities such as cyclones, floods, tsunamis, and storms hit large populations and wipe out settlements, especially of the economically disadvantaged communities who have little record of their assets, it becomes difficult to verify the losses.
Changing course
several insurance products
In this context, several insurance products based on the parameters of a weather event are needed.
In these, payments are triggered based on real-time measurements such as
- rain of more than 100 mm per day for two days in succession,
- or specific flood levels,
- and wind speed.
- For such ‘parametric’ products, payments are made regardless of actual loss or physical verification.
low frequency
insurers have been offering standardised parametric products only for low frequency, high-impact disasters such as earthquakes, cyclones, and hurricanes.
In 2023, for instance, after a 6.8 magnitude earthquake struck Morocco, the country received $275 million parametric insurance cover arranged with the help of the World Bank.
High frequency but low-impact disasters
such as
- landslides,
- rain, and
- heat were overlooked, but the consequences of climate change are slowly changing that.
insurance in india
crop insurance india
In India, one of the earliest uses of parametric policies was crop insurance, initiated by the government some years ago.
The successful Pradhan Mantri Fasal Bima Yojana is based on verification of loss, while a new parametric product, the Restructured Weather Based Crop Insurance Scheme is based on threshold limits, not requiring field verification.
private insurance industry in India
1 has witnessed a rising number of offers of parametric products, customised for States, corporations, self-help groups, and micro-finance institutions.
2 They insure disasters such as extreme precipitation, which is an endemic issue in the north-east; cyclones, which are a standard occurrence in coastal States; and extreme heat, a suddenly prominent and much-published hazard.
Who should bear the burden of paying premiums for parametric insurance coverage?
Nagaland was the first State to buy a parametric cover for extreme precipitation in 2021.
Based on lessons learned, it has tendered for the second improved version by fixing an absolute annual premium, duration and rate-on-line, allowing bidders to compete over lower threshold limits and maximised payouts.
It has imaginatively used the India Meteorological Department’s credible
- supply of data on precipitation for tehsil-sized grids,
- opening the doors for other States to consider similar products for insurance against cyclones, wind, and rain.
The Co-operative Milk Marketing Federation in Kerala
too has implemented parametric insurance for dairy farmers for lower milk yields due to heat stress to cattle.
daily payouts to workers
Some non-profits and micro-finance institutions have also worked with private insurers to implement daily payouts to workers who lose wages due to excessive heat, based on pre-defined temperature and moisture triggers.
Some large corporates
have initiated parametric products for cyclonic winds and high waves at competitive prices, using wind speed, cyclone tracks, and storm surge data.
Ensuring effective use
For governments to ensure effective use of parametric products, five factors are essential:
1 precise thresholds and proper monitoring mechanisms;
2 experience sharing between governments to incorporate lessons learned;
3 following the mandatory bidding process for transparent price discovery;
4 a widespread retail payout dissemination system;
5 and encouraging premium payment by households in the long term.
difficult in poorer populations
While this is more difficult in poorer populations, parametric insurance for earthquakes in New Zealand and Turkey has shown that it can be done.
India is uniquely placed for the use of such products, given that it has the Aadhaar-based payment dissemination system.
Aided by multilateral institutions, the Pacific and Caribbean Catastrophe Risk Insurance Companies have displayed regional pooling of risk and have successfully implemented parametric contracts with the insurance sector.
Given South Asia’s reputation as the world’s most “climate-vulnerable zone”, India and its neighbourhood could consider such products, pool their risks collaboratively, and strike better bargains with the world’s largest insurance companies.
source the hindu
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