Leveraging parametric insurance for climate adaptation and resilience in India

India faces a growing challenge in how to provide insurance protection against the economic losses caused by climate change. The country is particularly vulnerable to high-frequency, low- to medium-severity events such as floods triggered by heavy rainfall. Parametric insurance can help India build resilience against these events, because it automatically triggers payments based on predetermined climatic thresholds rather than requiring proof of damages.

This policy brief explores governments’ increasing use of parametric insurance in emerging markets. The authors focus on how a series of pilot projects in India have addressed some of the challenges traditionally associated with parametric insurance.

Core insights

To help ensure that parametric insurance strengthens India’s social safety net and finances its climate adaptation investments, policymakers should consider the following dynamics:

• Parametric insurance products provide fast, unbureaucratic payouts.
• The uneven distribution of payouts could threaten the financial sustainability of parametric insurance schemes.
• Pilot parametric insurance initiatives in Bihar, Gujarat, Maharashtra and Nagaland all benefited from fully subsidised insurance premiums.
• Multi-tier parametric insurance schemes could mitigate basis risk where there is a discrepancy between standardised triggers based on satellite data and microclimatic nuances on the ground.
• Historical climate data and a percentile-based approach could be used to calculate individual trigger points for each participating community and reduce negative basis risk.
• Subnational parametric insurance mechanisms could scale up community-based parametric insurance pilots, while strengthening states’ fiscal resilience.

DOI: 10.21953/researchonline.lse.ac.uk.00138979