Editorial of the Day (20 July): Promise of Parametric Insurance

Context: Parametric insurance emerges as a crucial alternative for enhancing disaster resilience globally.

Promise of Parametric Insurance: Background

• 2023 was the warmest year on record.
• As per a report, natural disasters caused losses amounting to $280 billion, with only about $100 billion insured.
• There was a significant disparity in insurance coverage between developed and developing economies.
• With the increase in extreme weather events, the insurance industry must find alternative coverage methods.

Current Insurance Methods

• Indemnity-based Insurance: The traditional method involves physical damage assessment for payouts.
• Challenges: Verification of losses is difficult, especially in economically disadvantaged communities with little asset records.

What is Parametric Insurance?

• Parametric insurance products, which do not require physical verification of losses, trigger payments based on measurable parameters of a weather event (e.g., rainfall exceeding 100 mm for two consecutive days, specific flood levels, or wind speeds).
• These products have been embraced by disaster-prone island countries and are gaining traction globally due to their effectiveness in climate adaptation and their role in building trust between states and insurers.

Current Application and Examples

• Global Initiatives: Morocco received a $275 million parametric insurance payout after a 6.8 magnitude earthquake, facilitated by the World Bank.
• India’s Experience
  • The Co-operative Milk Marketing Federation in Kerala has implemented parametric insurance for dairy farmers against lower milk yields due to heat stress on cattle.
  • The Pradhan Mantri Fasal Bima Yojana, a traditional crop insurance based on loss verification.
  • The Restructured Weather Based Crop Insurance Scheme, a new parametric product that does not require field verification.
  • Nagaland was the first Indian state to purchase a parametric cover for extreme precipitation in 2021, leading to a competitive bidding process for improved coverage terms in its subsequent iteration.
  • Parametric products are also used for insuring against disasters like cyclones, extreme precipitation, and heat in various Indian states.

Ensuring Effective Use

• Key Factors:
  • Precise thresholds and monitoring.
  • Experience sharing between governments.
  • Transparent price discovery through mandatory bidding.
  • Effective retail payout dissemination.
  • Encouraging long-term premium payments by households.
• Success Examples: New Zealand and Turkey’s parametric insurance for earthquakes.
• India’s Potential: Utilisation of Aadhaar-based payment systems and regional pooling of risks, similar to the Pacific and Caribbean Catastrophe Risk Insurance Companies.
• Regional Collaboration:
  • South Asia’s Climate Vulnerability: Considering regional risk pooling and collaborative bargaining with global insurance companies to enhance climate resilience.

Sharing is caring!