Heatwave Triggers Insurance Payouts: How Parametric Insurance Provides Respite To India's Climate Woes
Unlike traditional insurance, which requires loss assessment, parametric insurance triggers immediate payouts when predefined thresholds are breached.
Digital insurance company Go Digit, recently settled claims for migrant labourers in Noida under parametric insurance, as temperatures in the city breached the threshold of 42°C.
The company previously offered AQI-based parametric insurance to daily wage labourers of Delhi-NCR.
Parametric insurance provides fast, lump-sum payments upon the occurrence of a pre-determined data metric parameter, like weather, pollution and natural disasters. Unlike traditional insurance, which requires loss assessment, parametric insurance triggers immediate payouts when predefined thresholds are breached. By expediting the claims process, the insurance creates an opportunity to improve the policyholder’s experience, according to the General Insurance Council.
How It Works
Digit's parametric cover comes with a hospitalisation cash allowance of up to Rs 5,000 in case of any accidental injury or illness, applicable even if no temperature breach has occurred. This unique synergy is a game-changer in addressing climate-related risks, said Ayandev Saha, executive vice president, K.M. Dastur Reinsurance Brokers.
Under the Digit Parametric Insurance policy, the threshold temperature for each city has been set differently and is in the range of 42-43.70°C. The claim payouts are structured into two tiers. The first payout automatically kicks in if the temperature of a specific city crosses the threshold for five consecutive days. If the temperature exceeds the threshold for 10 consecutive days, the exit strike will kick in, leading to an additional payout. The insured migrant labourers will be paid up to Rs 3,000, allowing them to protect their health and afford daily necessities.
The product is not new. It has been used for almost 25 years in large-scale transactions such as catastrophe bonds in both the private and public sector, according to an explainer by the GIC. What is new, is the extension of parametric to the consumer level. Only now is data sufficiently available and technology adequately mature to enable the immediate, data-triggered payments of parametric insurance.
Parametric insurance is comparatively a newer concept in India and few players have started offering different types of climate risks-related parametric offerings. As India faces various climate-related challenges, parametric insurance has the potential to become a key offering to a large section of society, Agarwal explained.
While it is currently in its nascent stages, insurers can explore products related to various climate risks like extreme heat or cold, pollution, rainfall, humidity, etc. Products focusing on large-scale natural calamities like flood, cyclone and other catastrophes can also be explored. According to the General Insurance Council, it can also be used to cover low frequency risks like cyber-terrorism, political unrest, pandemic, warfare, global economic downturn and more, that until now have gone largely unprotected.
Data from artificial intelligence and machine learning is multiplying the types of risks that can be covered by parametric insurance, says the General Insurance Council.
For example, a parametric layer of insurance can be bundled with indemnity policies so that customers receive immediate (even if only partial) payouts the same day as a severe storm, an auto accident or a widespread power outage.
