July 4, 2024


đź“° FEATURE STORY

Can parametric insurance be a game-changer?

The past several years have seen India bear the brunt of several natural disasters. The future’s grim, given the alarming effects of global warming and climate change. Losses go well into the billions of dollars, and thousands perish. The most affected are, more often than not, the most vulnerable among us.

Given the financial hit, states pay to rebuild infrastructure and compensate families and individuals. With this in mind, India and some other countries are looking at parametric insurance as a tool to bridge any financial gaps. Unlike regular insurance, parametric insurance relies on a predetermined set of parameters that will trigger a payout. Is this just what the doctor ordered to ensure everyone is financially secure?

Context

If India wants to become a $5 trillion economy and more in the next few years, insurance will play a significant role in making that happen. There are a few things that usually hinder economic development – damage from natural disasters, the impact of climate change on agriculture, and inadequate health insurance.

India is seeing an increasing frequency of natural disasters, and it’s harder to predict them now. A report released by the UN Office for Disaster Risk Reduction (UNDRR) a few years ago showed India at No. 3, after China and the USA, in experiencing the highest number of natural disasters over the past 20 years. Global economic losses from natural disasters from 2000 to 2019 were estimated to be $3 trillion.

The statistics were alarming. The same report stated there were over 3,600 natural disasters from 1980 to 1999. That increased to over 6,600 in the following two decades. A silver lining was that mortality rates had decreased thanks to technological advancements. However, the report warned of the cost paid by citizens due to increased economic damages and disruption of their livelihoods.

Natural disasters mark almost every part of India. Some see a lot more than others. Between 2019 and 2023, India faced $56 billion worth of damages due to weather-related disasters. So, who pays for these damages? It usually comes from the National or State Disaster Response Fund. There’s also international aid if the situation is dire.

The National Disaster Management Authority contributes 75-90% of the money from the central government. The remaining comes from the states. Getting this money isn’t always easy. Things have gotten so bad that some state governments have gone to court since the Centre has delayed the release of funds.

Ultimately, the government needs to think of the people on the ground. They’re the ones affected. This is where parametric insurance comes in. It’s a form of climate change adaptation since governments can assess the possible damages in advance and plan their financial payouts. These payouts are triggered as soon as some pre-determined parameters are met. Should this model be more widespread?

VIEW: It’s the way to go

Parametric insurance is very much still in its infancy in India. The market is estimated to be valued at $50-100 million and is projected to grow by 20-25% in the next five years. There are currently about 15 parametric insurance products in India that cover several sectors, like livestock, aquaculture, silk cultivation, and warehousing. On the agricultural front, while government schemes can help farmers with their incomes, parametric insurance can further help bring in a much-needed safety net.

We’re already seeing some practical applications. Nagaland is the first state to use parametric insurance to protect against excessive rainfall. Last year, the Self-Employed Women’s Association (SEWA) piloted a heat insurance scheme for 21,000 members in four districts in Gujarat. There was a temperature threshold beyond which payouts were given to the members. It was a welcome move after several of their members suffered from lower wages after heatwaves in 2022.

Parametric insurance can complement traditional insurance coverage with an added layer of financial protection. The great thing about parametric insurance is that it can be deployed across different sectors since climate change doesn’t spare anyone, and people, especially the most vulnerable, don’t have to worry about financial compensation.

COUNTERVIEW: Uncertainties persist

Parametric insurance schemes are based on pre-determined criteria and factors. These involve intricate calculations to estimate the magnitude and frequency of a disaster over time and correspond to the value of damages that could occur. For these calculations, there needs to be adequate data on population and infrastructure. In developing countries, there aren’t enough people with specific skill sets to make these calculations.

Let’s take the Nagaland example. Despite heavy rainfall and floods, during the years it piloted the parametric insurance scheme, the payouts weren’t triggered. The data used to determine the parameters differed from the realities on the ground. The state used estimates from the NASA-supported CHIRPS satellite data. However, these varied from the India Meteorological Department’s gridded datasets. Losses occurred, and the threshold wasn’t met. It’s the “basis risk”, an inherent issue with parametric insurance. SEWA also faced a similar issue.

Even if a wider net is cast with the pre-determined parameters, the benefits will likely be insufficient for the worst affected. While insurance has been seen as a solution to deal with climate change since the early 1990s, some critics see the rising popularity of insurance as a way for developed countries to transfer their financial obligations onto the private sector. Also, premiums for parametric insurance are often higher due to the steps involved and the higher risk borne by the insurer.

Reference Links:

  • India at No. 3 in disaster ranking; worldwide losses at $3 trillion – Times of India
  • India hit by a fourth of Asia Pacific’s $230 bn economic loss due to weather disasters – Mint
  • Northern India floods will prompt insurance companies to hike premiums: Expert – Down To Earth
  • Indians are trying out a new insurance to deal with the costs of increasing natural disasters – Scroll
  • Growing Need for Parametric Insurance Amid Increasing Climate Challenges – The Economic Times
  • Insurance can trigger a more stable, more humane world. Here’s why – World Economic Forum
  • Can parametric insurance change the game in climate disasters? – Context

What is your opinion on this?
(Only subscribers can participate in polls)

a) Parametric insurance will be a game-changer.

b) Parametric insurance won’t be a game-changer.


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