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Climate Risk Insurance
Context:
The central government has tasked its top disaster management agency, the National Disaster Management Authority (NDMA), to develop an insurance product for mitigating financial losses due to climate-related disasters.
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- This initiative comes in response to the increasing frequency of extreme weather events in the country, particularly in disaster-prone areas.
- A significant portion of the population in these areas is currently unable to cope with the financial and social consequences of such events.
What is Climate Risk Insurance?
- Climate risk insurance refers to a financial risk transfer mechanism that provides protection against loss of life, livelihood, or assets due to extreme weather events.
- It ensures timely post-disaster payouts to individuals, households, communities, businesses, and governments.
- The mechanism helps spread risks before the actual damage occurs.
Establishment of Committee
- The NDMA has created a working group called the Committee on Disaster Risk Reduction (CoDRR).
- The Department of Financial Services is a member of this committee.
Insurance Product Focus
- The goal is to develop a single-peril parametric insurance product.
- This type of insurance will provide a fixed payout if a specific event (such as cyclones, floods, earthquakes, excessive heat, cold, or rainfall) occurs.
- Payouts will be based on the magnitude of the event (parameter), not on the actual losses suffered.
Government’s Role in Implementation
- Focus on Vulnerable Groups: The insurance product will primarily target economically vulnerable groups in disaster-prone areas.
- Subsidised Premiums: The government may subsidise premiums to make the insurance affordable for vulnerable populations.
- Involvement of States: States are expected to contribute financially to launch these insurance products, as high reinsurance costs could make them expensive otherwise.
Challenges and Industry Perspectives
- High reinsurance costs may make such products expensive, requiring government intervention.
- The insurance sector requires government, insurers, reinsurers, and regulators to collaborate.
- Establishing a ‘Catastrophe Fund’ is critical for the success of the initiative.
- The General Insurance (GI) Council official noted that past attempts to create such a fund failed due to lack of support.
Parliamentary Recommendation
- A parliamentary standing committee has recommended that insurance coverage should be made available for extreme weather events.
- According to the committee, India ranks third (after the US and China) in recording the highest number of natural disasters since 1900.
