The Rise Of Parametric Insurance: Can It Bridge The Protection Gap In Flood Zones?

The world is rapidly changing, and so are the risks related to climate change. With increasing technological advancements and industrialisation, the global risk of climate change is escalating day by day. The planet has already reached a critical environmental benchmark, and a shift in weather is a clear sign of climate change.

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BY Anuradha Mishra

How Parametric Insurance Works

Recent increases in earthquakes, heat waves, and floods are something we are all witnessing. For risk management, traditional insurance has been a backbone for covering against losses. However, with unprecedented changes in today's time, traditional policies somehow struggle to meet the demands. "Hence, Parametric insurance is a model designed to provide quick, transparent, and efficient financial protection. It is an index-based solution that defines pre-established parameters. Unlike traditional insurance, it doesn't wait for a loss to be quantified; it provides a payout as soon as the index is triggered, such as wind speed or, extreme rain, etc. This quick payout provides instant financial relief, which works to the policyholder's advantage," says Ashish Agrawal, head of business & CSC, Bajaj Allianz General Insurance.

Challenges Of Awareness And Affordability

Parametric insurance can be a game changer in addressing climate change and can help various sectors in the event of a disaster. One hurdle can be the accuracy of data. However, insurance companies are already leveraging data analytics and other technological advancements in their systems to provide accurate data and a better customer experience. "Parametric insurance relies on real-time data, and the reliability of this data is critical. By leveraging the correct technologies, insurers can collect adequate and accurate data for paying actual losses and determining payouts," says Agrawal.

Another challenge is that many people are unaware of such products, which can lead to low adoption rates. Affordability is another crucial aspect, as affordable options will enable vulnerable populations to use these products for financial safety. "Despite these challenges, there are promising examples, such as in Nagaland, where local authorities set region-specific thresholds using publicly available data, improving both accuracy and trust," says Agrawal.

A Role For Government And Public-Private Partnerships

Having said that, parametric cover will be the ideal way forward for protecting SMEs/ MSMEs from vagaries of nature such as floods, earthquakes, wind speeds, unseasonal rains, etc. "The government should play a more active role in propagating parametric insurance, either as a buyer or by entering into public-private partnerships to offer such covers as insurers. Till that happens, my humble opinion is that parametric insurance will remain a good talking point, but in terms of reducing the protection gap, it will not be a great alternative," says Balasundaram, secretary general of IBAI.