The promise of parametric insurance

The Hindu : Page 06

Syllabus : GS: 3 : Disaster Management

Context

•  In 2023, the warmest year on record, natural disasters caused $280 billion in losses, with only $100 billion insured.
•  The insurance industry faces challenges in covering these losses, especially in developing countries, highlighting the need for innovative approaches like parametric insurance to enhance disaster resilience and financial protection.

Record-Breaking Year 2023

•   The year 2023 was recorded as the warmest year on record.
•   A report estimated losses from natural disasters amounted to $280 billion in 2023, with only about $100 billion insured.
•   There is a significant gap in insurance coverage, particularly between developed and developing economies.
•   With increasing extreme weather events, the insurance industry must enhance disaster resilience through alternative coverage methods.

Present Method of Disaster Risk Reduction

•  Indemnity-based Insurance Products

o  The globally accepted method of disaster risk reduction involves indemnity-based insurance products.

o  These products require physical assessment of damage for payouts.

o  Given the unpredictability of future calamities, past precedents are no longer reliable.

o  Verification of losses becomes challenging, especially for economically disadvantaged communities with little record of their assets.

•   Benefits and Implementation

o  Parametric insurance builds trust between states and insurers, leading to reasonable pricing and trigger-payout combinations.

o  Historically, these products have been offered for low-frequency, high-impact disasters like earthquakes and cyclones.

o  In 2023, Morocco received $275 million in parametric insurance after a 6.8 magnitude earthquake, facilitated by the World Bank.

o  High-frequency, low-impact disasters like landslides and rain are now increasingly considered due to climate change.

Challenges in Traditional Insurance Methods

•   Growing Gap in Insurance Coverage: In 2023, global natural disaster losses amounted to $280 billion, with only $100 billion insured. Developing economies face wider gaps in insurance coverage compared to developed counterparts.
•  Call for Alternative Insurance Approaches: Parametric insurance products are gaining traction for their real-time trigger-based payouts. These products offer payments based on predefined weather parameters like rainfall or wind speed, bypassing the need for physical damage verification.

Adoption and Implementation of Parametric Insurance

•  Global Adoption Trends: Disaster-prone countries, particularly islands, have increasingly adopted parametric insurance for climate adaptation. Trust between states and insurers has improved over time, leading to more nuanced pricing and payout triggers.
•  Examples of Parametric Insurance Implementation: Morocco secured $275 million in parametric insurance cover post a 6.8 magnitude earthquake. India's experience includes parametric crop insurance and initiatives for extreme precipitation and cyclones.
•  Expansion Beyond High-Impact Disasters: Initially focused on earthquakes and cyclones, parametric insurance is now exploring coverage for low-impact, high-frequency events like rain and heat.

Ensuring Effective Use of Parametric Products

•   Key Factors for Government Implementation

o  Precise thresholds and proper monitoring mechanisms are essential for effective parametric insurance.

o  Governments should share experiences to incorporate lessons learned.

o  A mandatory bidding process is necessary for transparent price discovery.

o  There must be a widespread retail payout dissemination system.

o  Encouraging premium payment by households is crucial, though challenging for poorer populations.

•   Examples from Other Countries

o  Parametric insurance for earthquakes in New Zealand and Turkey demonstrates successful implementation even among poorer populations.

Potential for India and South Asia

•  India’s Unique Position

o  India is well-placed for the use of parametric products due to its Aadhaar-based payment dissemination system.

o  Regional pooling of risk has been successfully implemented by the Pacific and Caribbean Catastrophe Risk Insurance Companies.

o  Given South Asia’s vulnerability to climate change, India and its neighbours could consider collaborative risk pooling and parametric products.

Way Forward

•  Precise Thresholds and Robust Monitoring: Establish clear, accurate parameters for insurance triggers and implement reliable monitoring systems to track these parameters effectively.
•  Transparent Bidding and Experience Sharing: Follow a transparent bidding process for price discovery and facilitate the exchange of best practices and lessons learned between governments.
•  Widespread Payout Systems and Household Premium Support: Develop comprehensive systems for distributing payouts and promote long-term premium payment by households, leveraging tools like Aadhaar-based payment dissemination.

What Is Disaster

A disaster is a severe disruption occurring over a short or long period, affecting the functioning of a community or society at large. It results in widespread human, material, economic, or environmental losses which exceed the ability of the affected population to cope using its resources.

Types of Disasters

Disasters can be broadly classified into two categories:

•  Natural Disasters: These include events such as earthquakes, floods, hurricanes, tornadoes, volcanic eruptions, landslides, tsunamis, and droughts. Natural disasters are typically the result of natural phenomena and can have a devastating impact on life, property, and the environment.
•  Human-Made Disasters: Also known as man-made or anthropogenic disasters, these include events like industrial accidents, fires, nuclear explosions/radiation, chemical spills, and acts of terrorism. Human-made disasters result from human actions and can often be prevented through proper safety measures and regulations.

Difference Between Disaster and Hazard

•   It’s crucial to differentiate between a disaster and a hazard.
•   A hazard refers to a potential event that may cause loss of life, injury, property damage, social and economic disruption, or environmental degradation. Hazards can be natural or human-made.
•  A disaster occurs when a hazard impacts society or the environment severely or catastrophically. In essence, a hazard becomes a disaster when it meets vulnerability.

Disaster Management

•  Disaster management plays a vital role in minimizing the impact of unforeseen events. When disasters strike, it is crucial to have a well-prepared and coordinated response in place.
•  Disaster management encompasses the range of activities designed to maintain control over disaster events and provide a framework for helping at-risk populations avoid or recover from the impact of a disaster.
•  It involves a systematic process of using administrative directives, organizations, and operational skills to implement policies, strategies, and coping capacities to lessen the adverse impacts of hazards.
•   Effective disaster management strategies not only save lives but also help in the efficient allocation of resources and aid. With its comprehensive disaster management plans and dedicated teams, our organization is committed to safeguarding communities in times of crisis.
•   By employing proactive measures, conducting regular drills, and collaborating with local authorities, we strive to ensure a swift and effective response during emergencies.

Disaster Management Cycle

•  The disaster management cycle highlights the ongoing process by which governments, businesses, and civil society plan for and reduce the impact of disasters, react during and immediately following a disaster, and take steps to recover after a disaster has occurred. It consists of four phases:

1.    Mitigation: Efforts to reduce the impact of disasters.

2.    Preparedness: Planning how to respond.

3.    Response: Efforts to minimize the hazards created by a disaster.

4.    Recovery: Returning the community to normal.

Disaster and Disaster Management in India

In India, a country prone to a variety of natural and human-made disasters, understanding disaster and disaster management is crucial for minimizing risks and enhancing resilience. Here are ten key aspects to consider:

•   Diverse Geography: India’s vast and varied geography makes it susceptible to different types of natural disasters, including cyclones, earthquakes, floods, and droughts, necessitating region-specific disaster management strategies.
•   Legislative Framework: The Disaster Management Act of 2005 provides a legal and institutional framework for disaster management in India, establishing the National Disaster Management Authority (NDMA), State Disaster Management Authorities (SDMAs), and District Disaster Management Authorities (DDMAs).
•  Community Participation: Effective disaster management in India emphasizes community participation, recognizing that local knowledge and involvement are critical for disaster preparedness, response, and recovery.
•  Integrated Approach: India adopts an integrated approach to disaster management that includes mitigation, preparedness, response, and recovery, ensuring a comprehensive strategy to manage disasters.
•  Technology and Innovation: The use of technology and innovation, including satellite communication, GIS mapping, and early warning systems, plays a significant role in disaster risk reduction and management.
•  Capacity Building: Building the capacity of disaster management professionals and local communities through training and awareness programs is a priority to enhance disaster preparedness and response mechanisms.
•   International Cooperation: India actively engages in international cooperation for disaster risk reduction, sharing best practices and learning from global experiences to strengthen its disaster management capabilities.
•   Focus on Vulnerable Groups: Special attention is given to vulnerable populations, including women, children, the elderly, and people with disabilities, ensuring that disaster management efforts are inclusive and equitable.
•  Economic Impact Assessment: Assessing the economic impact of disasters is essential for planning recovery efforts and allocating resources efficiently to rebuild and rehabilitate affected communities.
•   Sustainable Development: Disaster management in India is increasingly aligned with sustainable development goals, recognizing that reducing disaster risk contributes to sustainable economic growth and development.