Syllabus
GS Paper 3 – Indian Economy (issues re: planning, mobilisation of resources, growth, development, employment); Inclusive growth and issues therein; Disaster Management
Context
In 2023, the world witnessed its warmest year on record, accompanied by a surge in natural disasters that caused an estimated $280 billion in economic losses.
Source
The Hindu| Editorial dated 20th July 2024
The promise of parametric insurance
In 2023, the world witnessed its warmest year on record, accompanied by a surge in natural disasters that caused an estimated $280 billion in economic losses. Of this, only about $100 billion was insured, highlighting a significant gap in insurance coverage between developed and developing economies. This alarming trend underscores the urgent need for the insurance industry to innovate and enhance disaster resilience, particularly through the adoption of parametric insurance products.
Current Insurance Practices
- Indemnity-Based Insurance Products:
- These products are the traditional and globally accepted method for disaster risk reduction.
- They require a physical assessment of damage to determine payouts.
- Example: Home insurance policies that require damage assessment after events like fires or floods.
- Challenges:
- Verification Difficulties: When calamities hit large populations, especially economically disadvantaged communities, it becomes difficult to verify losses.
- Lack of Asset Records: Many in these communities have little to no formal record of their assets, complicating the verification process.
Parametric Insurance Products
- These insurance products trigger payments based on real-time measurements, such as rain levels, flood stages, or wind speeds, rather than actual assessed damage.
- Example: Policies that pay out if rain exceeds 100 mm per day for two consecutive days.
- Advantages:
- Speed: Payments are made quickly since they are based on pre-defined parameters and do not require physical damage assessment.
- Transparency: Reduces disputes over loss assessments, leading to quicker financial relief.
- Adoption in Disaster-Prone Regions:
- Many island countries have adopted parametric insurance for climate adaptation.
- This shift from risk retention to risk transfer has built trust between states and insurers, improving pricing and payout structures
- Standardised Products:
- Currently offered for low frequency, high-impact disasters such as earthquakes, cyclones, and hurricanes.
- Example: Morocco received $275 million in parametric insurance after a 6.8 magnitude earthquake in 2023.
- Expanding Coverage:
- The rise in climate change-related events is driving the inclusion of high frequency, low-impact disasters such as landslides, heavy rain, and extreme heat.
Parametric Insurance in India
- Early Adoption:
- The Indian government-initiated crop insurance schemes like the Pradhan Mantri Fasal Bima Yojana (PMFBY) and the Restructured Weather Based Crop Insurance Scheme (RWBCIS).
- PMFBY relies on loss verification, while RWBCIS uses parametric thresholds, avoiding the need for field verification.
- Private Insurance Sector:
- There is a growing number of parametric insurance products tailored for states, corporations, self-help groups, and micro-finance institutions.
- Example: Policies for extreme precipitation, cyclones, and extreme heat.
- Specific Coverages:
- These policies address endemic issues like heavy rains in the northeast, cyclones in coastal areas, and heat waves.
- Non-profits and Corporates:
- Some non-profits and corporations have partnered with private insurers to offer daily payouts based on pre-defined weather triggers, helping workers and communities cope with heat stress and other climate impacts.
Case Studies
- Nagaland:
- The first Indian state to purchase parametric cover for extreme precipitation in 2021.
- An improved version was later tendered, using data from the India Meteorological Department.
- Kerala:
- The Co-operative Milk Marketing Federation implemented parametric insurance for dairy farmers to protect against heat stress impacts on milk yield.
Opportunities for India
- Unique Position:
- India can leverage its Aadhaar-based payment system for effective payout distribution.
- Regional Pooling of Risk:
- Drawing inspiration from the Pacific and Caribbean Catastrophe Risk Insurance Companies, India could facilitate regional risk pooling.
- Collaborative Risk Management:
- Given South Asia’s status as a climate-vulnerable zone, countries in the region could collaborate to pool risks and negotiate better terms with global insurers.
Ensuring Effective Use of Parametric Products
Five Essential Factors to ensure effective use of parametric products:
- Precise Thresholds and Monitoring Mechanisms: Accurate data is crucial for determining when payouts are triggered.
- Experience Sharing: Governments and organizations should share their experiences to improve implementation and outcomes.
- Transparent Price Discovery: A mandatory bidding process ensures fair and competitive pricing.
- Retail Payout Dissemination: Efficient systems are needed to distribute payouts widely and promptly.
- Encouraging Premium Payment by Households: Promoting household participation can ensure the long-term sustainability of parametric insurance schemes, though this is challenging for poorer populations.
Conclusion
As climate change intensifies, the frequency and severity of natural disasters are expected to rise, making it imperative for the insurance industry to adapt. Parametric insurance products present a viable solution, offering rapid, reliable payouts based on predefined triggers. The successful implementation of these products in various regions, including disaster-prone areas and sectors in India, demonstrates their potential to bridge the insurance coverage gap.
Related PYQ
Given the vulnerability of Indian agriculture to vagaries of nature, discuss the need for crop insurance and bring out the salient features of the Pradhan Mantri Fasal Bima Yojana? [ UPSC Civil Services Exam – Mains 2016]
Practice Question
Discuss the potential of parametric insurance products in enhancing disaster resilience in developing economies? [150 words]