There is a need for a proper policy framework that will help states fund parametric insurance premiums, along with higher awareness of the need for the cover, said Surbhi Goel, India CEO, Munich Re, to Business Standard. It is the uncertainty about how to fund the premium that is holding back state governments from adopting disaster risk transfer parametric insurance, she said.
Parametric (or index-based) insurance is a type of coverage that focuses on the likelihood or probability of a loss-causing event occurring, rather than indemnifying the actual losses sustained. This type of insurance involves an agreement to make a payment when a specified event reaches or exceeds a predefined threshold, which is determined by an objective measurement or parameter.
For example, the covered events could include earthquakes, tropical cyclones, or floods, with the parameters or indices being the magnitude of the earthquake, wind speed of the cyclone, or water depth in the case of a flood.
In India, currently, the Nagaland State Disaster Management Authority (NSDMA) is the only state entity that has signed a memorandum of understanding (MoU) with SBI General Insurance for the Disaster Risk Transfer Parametric Insurance Solution (DRTPS), which will help protect the state’s critical infrastructure and reduce economic losses due to disasters. GIC Re and Munich Re are acting as reinsurers for three years.
“Apart from awareness, I would say that a policy framework around disaster risk transfer and the use of insurance as a mechanism is essential,” said Goel.
Also Read
“One of the key things needed is more concrete guidance on the source of finance for implementing insurance schemes. A framework for insurance financing would be crucial, as even if states want to buy insurance, what holds them back is uncertainty about how to fund the premiums… Addressing the funding aspect would help improve the uptake of parametric insurance,” she added.
The premiums for parametric insurance coverage are usually in the range of 5-8 per cent of the sum insured. However, there is no specific sum insured.
“…there is a bit of ambiguity and scepticism around how the premiums for insurance would be financed. If we could develop a framework with the government on how to finance these premiums, it would encourage more adoption. The concern is about where the premium will be funded from,” said Goel.
Additionally, Goel said that an additional allocation of funds from the State Disaster Management Fund (SDMF) towards insurance and continuous dialogue between various stakeholders is necessary to promote insurance as an effective risk transfer tool. Further, natural disasters occurring across India are triggering more enquiries from other states.
In a recent report, Munich Re noted that worldwide, natural disasters caused losses of $320 billion in 2024, compared to $268 billion in 2023. Of this, around $140 billion was insured, compared to $106 billion in 2023. In 2024, India witnessed multiple natural catastrophes, including Cyclone Remal, landslides in Wayanad, Cyclone Fengal, and cloudbursts in Himachal Pradesh, among others.
Apart from parametric insurance, Munich Re aims to continue growing sustainably in the Indian insurance market by focusing on long-term partnerships with risk transfer solutions in property, engineering, agriculture, and cyber. It also plans to continue developing and offering innovative insurance solutions such as performance warranties for solar PV and battery performance cover for electric vehicles (EVs), thereby promoting the energy transition in India.