Parametric Insurance

Source: The post parametric insurance has been created, based on the article “The promise of parametric insurance” published in “The Hindu” on 20th July 2024

UPSC Syllabus Topic: GS Paper3- Disasters management

Context: The article discusses the need for parametric insurance to cover losses from extreme weather events. Parametric insurance provides payouts based on predefined weather conditions without physical damage assessment. This approach helps in quickly supporting affected populations and reducing financial burdens.

What was the impact of natural disasters in 2023?

1. 2023 was the warmest year on record.
2. Losses from natural disasters amounted to $280 billion.
3. Only about $100 billion of these losses were insured.
4. The gap in insurance coverage was especially wide between developed and developing economies. Enhancing disaster resilience through alternative insurance methods is crucial.

What is parametric insurance, and how is it different from indemnity-based insurance?

Parametric insurance makes payouts based on predefined weather conditions like rain levels or wind speeds, allowing quicker responses without physical damage assessment. For instance, Morocco received $275 million after a 6.8 earthquake in 2023.
In contrast, indemnity-based insurance requires physical assessment to verify losses, which can be difficult in large-scale disasters, particularly for disadvantaged communities.

How is Parametric Insurance Used in India?

1. India uses parametric policies for crop insurance. Pradhan Mantri Fasal Bima Yojana verifies loss; the Weather Based Crop Insurance Scheme uses threshold limits.
2. Nagaland: Purchased parametric insurance for extreme rainfall in 2021, with the policy details based on weather data for precise locations.
3. Kerala: The Co-operative Milk Marketing Federation uses it for dairy farmers to cover heat stress.
4. Non-profits and Micro-finance Institutions in India: Implement daily payouts for workers affected by excessive heat.

How can parametric insurance be improved?

1. Experience Sharing: Governments should share lessons and strategies to refine parametric insurance models.
2. Transparent Bidding: Implement transparent bidding processes for premium rates to foster competition and lower costs.
3. Retail Payout System: Develop a widespread payout system, leveraging technology like India’s Aadhaar-based payment system for efficient distribution.
4. Encourage Household Premiums: Motivate households, especially in poorer regions, to participate in premium payment schemes for long-term resilience.

Question for practice:

Discuss how parametric insurance differs from indemnity-based insurance and its application in India.