Q. With the world experiencing a surge in extreme weather events, the insurance industry needs to enhance disaster resilience by parametric insurance coverage. Discuss. (10 Marks, 150 Words)

Core Demand of the Question:

  • Highlight the surge in extreme weather events being experienced by the world.
  • Discuss the need to enhance disaster resilience by parametric insurance coverage for the insurance industry.

 

Answer:

With the world experiencing a surge in extreme weather events, the insurance industry must enhance disaster resilience through innovative solutions like parametric insurance coverage. Unlike traditional insurance, parametric insurance provides quick payouts based on predefined triggers, offering timely financial support and aiding faster recovery for affected communities. 

Parametric Insurance:

  • Parametric insurance is a type of coverage that provides predefined payouts based on specific triggers or parameters, such as the magnitude of an earthquake, wind speed in a hurricane, or rainfall levels during a flood. 
  • Unlike traditional insurance, which requires an assessment of actual damage, parametric insurance disburses funds quickly once the triggering event meets the set criteria. 
  • This approach enables rapid financial response, aiding in immediate recovery efforts. It is particularly beneficial for high-frequency, low-impact disasters and in regions with limited access to traditional insurance, enhancing resilience against climate change and extreme weather events.

 

Surge in Extreme Weather Events Globally:

  • Increased Frequency of Cyclones: The number of cyclones has risen, causing widespread damage.
    For example: In 2020, Cyclone Amphan devastated parts of India and Bangladesh, displacing millions and causing billions in damages.
  • Intensifying Heatwaves: Heatwaves are becoming more frequent and severe, impacting health and agriculture.
    For example: The 2021 heatwave in Canada and the Pacific Northwest of the USA led to hundreds of deaths and massive wildfires.
  • Rising Sea Levels: Coastal areas face increased flooding and erosion due to rising sea levels.
    For example: Island nations like the Maldives are at risk of becoming uninhabitable due to persistent sea-level rise.
  • Prolonged Droughts: Extended drought periods are affecting water supply and agriculture.
    For example: The prolonged drought in California has severely impacted agriculture and water resources.
  • Intense Rainfall and Flooding: Unprecedented rainfall events are causing severe flooding and landslides.
    For example: The 2021 floods in Western Europe, particularly in Germany and Belgium, resulted in significant loss of life and property.

Enhancing Disaster Resilience with Parametric Insurance Coverage:

  • Real-Time Measurement: Parametric insurance uses real-time data to trigger payouts based on specific parameters.
    For example: Morocco received $275 million in parametric insurance after a 6.8 magnitude earthquake in 2023.
  • Quick Payouts: Payments are made swiftly without the need for physical damage assessment.
    For example: Parametric insurance for hurricanes in the Caribbean provides immediate financial relief post-disaster.
  • Coverage for Low-Impact Events: Expanding coverage to include high-frequency, low-impact events like heat waves and heavy rains.
    For example: Nagaland’s parametric cover for extreme precipitation helps manage frequent but less catastrophic weather events.
  • Trust and Pricing: Building trust between insurers and states can lead to better pricing and coverage terms.
    For instance: The Pacific and Caribbean Catastrophe Risk Insurance Companies have successfully implemented regional risk pooling.
  • Customizable Products: Insurance products can be tailored to specific needs and conditions.
    For example: Kerala’s parametric insurance for dairy farmers protects against reduced milk yields due to heat stress.

By leveraging real-time data and providing quick payouts, parametric insurance can significantly reduce financial burdens and improve recovery efforts. As climate risks intensify, integrating parametric insurance into national and regional strategies will be crucial for building a resilient future.

 

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