In today's rapidly changing world, risks are evolving. Climate change, rapid technological advancements, and accelerating industrialisation are transforming the global risk landscape. Recent statistics paint a sobering picture: in 2024, the planet reached a critical environmental benchmark, with Earth's average temperature soaring to 1.62 degrees Celsius above pre-industrial levels. This figure not only eclipses the Paris Climate Agreement's targets but also sets a precedent for the coming decades (Source WEF White paper).
With Myanmar recently experiencing a devastating 7.7 magnitude earthquake that resulted in significant human and economic losses, it raises pressing concerns about the potential impact of similar events occurring in our own country (
Source Scientific American).
Experts warn that a major earthquake in the Himalayan region is overdue and could happen at any time, with the potential to cause severe repercussions in the northern part of our nation.
Climate change is increasingly impacting global trade. Due to reduced water levels, the Panama Canal authorities have imposed strict restrictions on ship voyages.
As a result, cargo ships face prolonged delays—sometimes waiting days or weeks—when crossing the canal. The ongoing drought severely disrupts shipping operations, leading to significant economic losses in global trade. (source WEF).
Traditional insurance has long been the backbone of risk management, offering structured coverage against losses while relying on detailed loss assessments.
Yet, in an era of unprecedented change, traditional policies sometimes struggle to meet the demands of rapidly evolving risks. This is where parametric insurance steps in—a model designed to provide swift, transparent, and efficient financial protection.
Parametric insurance is an index-based solution that defines coverage through clear, pre-established parameters. Instead of waiting for a loss to be quantified, pay-outs are triggered immediately when the parameters—such as extreme weather indicators, wind speeds, seismic activity, or even operational metrics like customer footfall— strike a predetermined threshold.
A trusted, independent authority verifies these indices. This speed and simplicity translate into prompt financial relief for policyholders, a critical advantage in times of crisis.
One of the most compelling implementations of parametric insurance is seen in weather-based crop insurance schemes. Farmers facing unpredictable weather patterns—such as erratic rainfall, sudden temperature spikes, high winds or excessive humidity— If the intensity of these perils exceeds the set index, a pay-out is triggered and credited to the farmer's bank account. This model safeguards farmers' livelihoods and stabilises food supply chains.
Beyond agriculture, in the construction industry, for instance, project timelines are often jeopardised by adverse weather conditions like extreme heat, poor air quality, or violent storms; any delay in construction, especially for critical infrastructure like hospitals and bridges, can have far-reaching implications. With a parametric solution, delays beyond certain days automatically trigger a pay-out, enabling contractors to mobilise additional resources and keep projects on track.
India's ambitious goal of achieving 500 GW of renewable energy capacity by 2030 necessitates a strong defense against the unpredictability of nature. The renewable energy sector relies heavily on naturally replenished resources such as sunlight, wind, water, biomass, and geothermal heat.
However, production can be hindered by factors like cloud cover, reduced wind speeds, or lower water levels during droughts. Parametric insurance provides a safety net by compensating for shortfalls in these resources.
For instance, solar irradiance or wind speed can serve as triggering indices for pay-outs, ensuring financial stability and continuity in energy production despite natural fluctuations. Also bring business certainty and banks/ private equity investors look at it favourably.
Initiatives like the Nagaland government's Disaster Risk Transfer Parametric Insurance Solution, which provides financial cushion to the people of the state from critical infrastructure loss and economic losses, are commendable solutions that should be incorporated in every state.
Populations residing in areas vulnerable to natural catastrophic events should be mandated to have property insurance. The premiums for this insurance could be collected alongside property taxes, streamlining the process. This approach would alleviate the financial burden on residents and the government during widespread crises, ensuring faster recovery and better disaster preparedness.
Traditionally associated with weather-related events, Parametric insurance has seen significant advancements in other spectrums.
For example, cloud outages affecting e-commerce companies can temporarily close websites or applications during maintenance or troubleshooting, resulting in revenue losses due to business interruptions. Such losses can be compensated through pay-outs triggered by predefined parameters, such as the duration of downtime, measured in hours or days.
Parametric insurance can be a game-changer for the hospitality sector, particularly during situations like a pandemic, high alert or outbreak that significantly reduces footfall.
For instance, if a predefined trigger such as a drop-in tourism activity or occupancy rates below a certain threshold occurs—measured by reliable indices like local air travel statistics or hotel booking data—the insurance pay-out is automatically activated.
Additionally, if an individual's travel itinerary is hampered due to heavy rainfall or adverse climatic conditions and is forced to remain confined to their room, striking a predetermined number of confinement days, a pay-out may be triggered.
Insurers are now leveraging data analytics and integrating API technology into their systems to enhance efficiency and customer experience. In the context of travel disruptions, the insurer maintains access to the insured's travel details, actively monitors the movements of the flights, and provides real-time updates to the insured.
For instance, if a flight is delayed by 3 hours, the system automatically triggers a pay-out to grant access to an airport lounge. For an 8-hour delay, a higher pay-out enables travellers to check into a hotel to rest.
In prolonged delays, such as "X" hours, the API ensures swift processing, facilitating the issuance of a new flight ticket to the destination. This seamless solution minimises inconvenience and prioritises travellers' comfort and needs.
Imagine parametric insurance covering daily commute events—like attending an IPL Match or concert of your favourite band or singer in another town. If extreme conditions, such as heavy rainfall, prevent you from reaching the event, this insurance could rescue you. When the rainfall intensity surpasses the agreed-upon trigger, the cost of your tickets could be reimbursed.
Budding entrepreneurs and small and medium-sized enterprises (SMEs) are essential to our economy, contributing approximately 30% to India's Gross Domestic Product (GDP) (Source PIB). They also serve as major employment generators, providing jobs to more than 100 million people, making them the second-largest employer after agriculture. (Source Invest India)
Beyond their role in job creation, SMEs drive innovation and economic growth. However, they remain highly vulnerable to natural catastrophic (Nat-cat) events. Given their susceptibility and importance, SMEs should be institutionally covered under a government-backed parametric insurance scheme to strengthen their resilience.
Implementing parametric solutions to safeguard these businesses ensures their resilience and long-term stability.
As we navigate an era defined by rapid technological advancements and profound environmental shifts, our traditional methods of risk management are being reimagined.
The emerging paradigm of parametric insurance is not merely a financial tool—it embodies a visionary approach that pragmatically addresses a world marked by unforeseen challenges.
By triggering automatic, data-driven responses to predefined risks, this solution offers immediate relief in the wake of calamities, bridging the gap between unpredictability and preparedness.
This evolution in risk management challenges us to think deeply about the interplay between progress and vulnerability. It reminds us that while change is inevitable, the essence of our response lies in our ability to adapt quickly, learn continuously, and innovate tirelessly.
In this way, parametric insurance emerges as not just a remedy for immediate losses, but as a beacon guiding us toward a more secure, agile, and resilient tomorrow.
(The author is MD & CEO, Bajaj Allianz General Insurance)
(: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
