India weighs climate-linked insurance scheme

Initiating talks with local insurers, the Indian government is considering designing a nationwide climate-linked insurance programme aimed at simplifying the payout process after extreme weather events such as heatwaves and floods, according to a Reuters report.

The scheme would adopt a parametric insurance model, where policyholders receive a pre-determined payout when specific weather thresholds such as rainfall, temperature or windspeed are breached. Should the discussions bear fruit, India – among nations most prone to extreme weather events – could become one of the first major economies to roll out such a programme, Reuters reports. The move would also help the government, which now uses funds earmarked for disasters to help states with adverse climate events, rein in costs as insurers would be taking on more risk.

Under a parametric model, payouts can be made very quickly, whereas in traditional insurance, payments are based on the loss sustained and assessments can take years. Parametric insurance can also be used to offer coverage in areas where traditional insurance is rare. Federal government officials are backing the idea though no formal proposal has been floated yet. As a World Economic Forum (WEF) article highlights, extreme weather events are increasingly affecting the businesses and livelihoods of people around the world. Parametric insurance products can offer better protection through automatic payouts without the need for complex claims.

The WEF article draws attention to a parametric insurance scheme launched by SEWA, a member of the UN’s Better Than Cash Alliance. SEWA is India’s largest trade union for informal women workers. It champions economic security and self-reliance for its more than three million members. The scheme helps rural women withstand the impact of extreme weather on their livelihoods by offering innovative insurance products with automatic payouts, eliminating complex claims processes. It was launched in 2023 in partnership with Arsht-Rock, a climate resilience solutions provider, and expanded in 2024 with support from Climate Resilience for All, a global climate adaptation NGO. It provides automatic payouts when extreme heat persists for two days. Using real-time weather data, it eliminates complex claims, ensuring women receive support without bureaucratic hurdles.

The WEF article points out how for women farmers in rural India, the effects of climate change are compounded by limited access to finance, smaller plots and fewer land rights. Products like parametric insurance are sorely needed in such cases. In India, where farming relies on seasonal monsoons, even small shifts in conditions can disrupt entire seasons. And rural women farmers – who already have less access to finance, smaller plots and fewer land rights – bear the brunt of climate change.

Another WEF report says that amid an increasingly volatile climate risk landscape and challenging underwriting conditions, insurers are increasingly turning to parametric insurance to fill protection gaps and protect vulnerable communities and economies from climate risks. Also known as event or index-based insurance, parametric products trigger payouts when specific conditions are met, such as certain levels of rainfall or wind speed.

This report adds that this offers rapid, flexible payouts based on pre-defined triggers such as rainfall or wind speed. Innovative applications, such as satellite and artificial intelligence (AI) powered parametric products, address previously uninsurable climate risks. While parametric insurance expands, its reliance on specific triggers poses coverage gaps and sustainability challenges as climate risks intensify. Unlike traditional insurance, which is based on the actual losses sustained, parametric insurance is linked to a specified event. This expands the scope of coverage and addresses gaps that conventional policies often leave unprotected. By leveraging publicly available weather data, such as rainfall, wind speed or temperature, parametric products reduce information asymmetry between policyholders and insurers, ensuring a more transparent and efficient response when climate disasters strike. As climate risks become more frequent, intense and prolonged, parametric insurance offers a crucial tool to help mitigate direct and indirect losses.

According to the Reuters report, interest in parametric insurance is on the rise globally. For instance, in 2023, Fiji became the first Pacific Island nation to adopt a sovereign parametric insurance policy, securing coverage against tropical cyclones. The use of financial instruments to mitigate climate risk is also expected to feature prominently at the COP30 summit in Brazil this November.