(Prelims: Current Affairs)
(Mains, General Studies Paper- 3: Disasters and Disaster Management) |
Context
Extreme weather events such as floods, landslides and droughts are becoming more frequent and unpredictable due to climate change in India. Traditional insurance models are inadequate to deal with these unpredictable and frequent disasters. Hence, parametric insurance has emerged as an innovative solution that provides speed and transparency in dealing with the climate crisis.
About Climate Crisis in India
- Increase: Increase in the frequency and intensity of natural disasters since 2000, e.g. more than 20 flash floods and landslides in Himachal Pradesh in 2025
- Economic losses: Losses of $56 billion in 2019-2023, which is 25% of the total climate losses in the Asia-Pacific region.
- Impact: Destruction of infrastructure, loss of livelihoods and threat to food security
- Example: Displacement of thousands of people due to heavy rains and floods in Himachal Pradesh and Uttarakhand in the year 2023
What is parametric insurance
- Definition: It is an insurance model that makes automatic payments based on a pre-determined index, such as rainfall, temperature or wind speed.
- Key features:
- Automatic payment: When the index (eg. rainfall less than 300 mm or temperature more than 40 °C) is crossed, the payment starts immediately.
- Verified data: Use of data from the India Meteorological Department (IMD) or global satellite systems.
- Transparency: No subjectivity in the payment process, everything is pre-defined.
- Applications: In sectors like agriculture, renewable energy, transport and animal husbandry.
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Difference between Parametric Insurance and Traditional Insurance Models
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Feature
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Traditional Insurance
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Parametric Insurance
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Payout Process
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Payment is made after assessment and verification of losses, which may take months.
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Automatic payout within hours based on a pre-defined index.
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Complexity
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Requires inspections and paperwork for claims.
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No inspection needed; quick data-driven process.
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Cost
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High administrative costs and delays.
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Low cost, fast, and transparent.
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Suitability
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Suitable for small, localized losses.
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Ideal for extreme and unpredictable climate events.
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Parametric insurance helps in climate crisis
- Fast relief: Payout immediately after disaster, allowing for quick seed purchase, loan repayment and working capital restoration
- Agricultural support: Automated payouts to small farmers to prevent loan defaults during drought or extreme temperatures
- Renewable energy: Compensate solar energy companies for losses due to lack of solar light
- Economic stability: Protects livelihoods and infrastructure in disaster-affected areas
- Risk management: Provides financial flexibility amid climate uncertainty
Current Applications of Parametric Insurance
- India:
- Rajasthan & Uttar Pradesh: Pilot project to protect thousands of women small farmers from drought, using water balance index.
- Nagaland: First Indian state to purchase multi-year parametric cover for landslides & heavy rainfall in 2024.
- Jharkhand: Microfinance institutions implemented automatic credit support policy for low rainfall or high temperatures.
- Global:
- Africa: Parametric insurance for drought and floods
- Pacific Islands: Cover for cyclones and flood depths
- UK: Parametric products for extreme weather events
Challenges
- Data availability: Limited access to accurate and reliable climate data (IMD, satellite), especially in rural areas.
- Lack of awareness: Low understanding and acceptance of parametric insurance among small farmers and MSMEs
- Financing: High initial cost for large-scale implementation
- Policy framework: No clear regulatory framework for parametric insurance in India
- Capacity building: Lack of technical expertise among insurance companies and local administrations
Way forward
- Expansion: Promote parametric insurance in states and union territories like the Nagaland model
- Data infrastructure: Expand IMD and satellite data networks, especially in rural areas
- Awareness campaign: Education on parametric insurance for farmers, MSMEs and policy makers
- Regulatory framework: Clear guidelines and standards for parametric insurance under IRDAI
- Financial support: Budget allocation for parametric insurance from disaster funds by central and state governments
- Private sector participation: Encourage insurance companies and startups to develop parametric products through digital platforms
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