As climate chaos intensifies, businesses turn to parametric insurance: Will it be the ultimate hedge?

A solar farm owner in Rajasthan placed a big bet on harnessing the sun with a lump sum investment. However, as the unpredictability of the climate would have it, in 2023, the state received low sunshine on several days, resulting in the underperformance of the farm owner’s million dollar firm. To clear the clouds over his returns, he opted for a parametric cover and now receives payout on low sunshine days. He’s not alone. There has been growing interest in parametric insurance among renewable energy players, including investors and lenders looking for protection against weather events like low sunshine and poor wind availability, which are uninsurable in the traditional market. Parametric cover provides financial stability, especially at a time when weather patterns have been fluctuating due to climate change. Pankaj Tomar, Head of India at consulting firm AXA Climate, says renewable energy is one area that is picking up very fast in terms of parametric insurance in India. “Certain parts of India have witnessed diminishing wind and solar radiation due to climate change, which is likely to impact the country’s ambitious clean energy plans. Stakeholders will need to protect their investments and parametric insurance is clearly a viable solution,” Tomar tells BT. All major insurance and re-insurance players have been offering parametric products for solar and wind power projects. For the first time, a product has been devised for a big hydroelectric project in Uttarakhand, hedging against risk from floods and earthquakes. This comes at a time when lenders and investors of renewable energy assets are getting concerned about profitability. “Investors are increasingly concerned about the trend of decreasing wind energy potential, particularly in regions where large pools of wind farms have already been established. This is driving the demand for parametric insurance solutions,” Tomar adds. Not just in the energy sector, e-commerce players, FMCG companies, state governments, and even daily wage workers are getting parametric insurance coverage against high rainfall, extreme heat, severe cyclones and other catastrophic events. All want to hedge their returns and livelihood against climate risk. Parametric insurance does not work on the principle of indemnity. It is agnostic to the actual loss a business may suffer because of an event. It covers the probability of pre-defined climatic events, like earthquakes or cyclones. But the question is—who will decide? The insurance company and client agree on a third party agency, which can be a meteorological agency, which certifies if a natural calamity has occurred and determines its magnitude, eliminating the need for a surveyor to conduct a loss survey. Hence, payouts happen quickly. Climate change is impacting businesses across sectors and that is widening the products and customisation of parametric insurance globally. A report by the University of Delaware released in December 2023 said that India suffered 8% of GDP loss in 2022 due to climate change. Climate-Proofing Businesses FMCG players like PepsiCo and Coca-Cola, e-commerce player Flipkart, and app-based cab-hailing service Uber are all considering parametric covers to protect their businesses against extreme climate events. Let’s unpack why. Take Uber for example. Heavy rainfall affects bookings on the app, affecting demand. Uber India is now in talks with insurance players to cover the risk of rainfall beyond a certain threshold to minimise losses. In the case of beverage–makers Coca-Cola or Pepsi in India, fluctuating temperatures during the summer in North India could affect demand. Therefore, these companies are looking for safeguards against the drop in sales. [Parametric insurance] products can be customised to offer coverage for most climate-related risks where reliable data is available -Deepak Kumar, Senior EVP &amp; Head– Reinsurance, Credit &amp; Aviation Insurance, Tata AIG General Insurance Parametric insurance started in agriculture some two decades back, but many other sectors are exposed to climate risks as well. Deepak Kumar, Senior Executive Vice President &amp; Head of Reinsurance, Credit &amp; Aviation Insurance, at insurance company TATA AIG General Insurance, says the demand for weather-related insurance is growing steadily, driven by awareness of climate risks and the need for financial resilience. “Our clientele includes renewable energy players, government disaster management committees, banks, NBFCs, and other corporations whose financial stability may be affected by adverse weather conditions,” says Kumar. Coverage, premiums, and payouts are customised to meet the specific needs of each client, he adds. TATA AIG’s parametric products are designed to address a wide range of climate-related perils such as lack of wind or solar radiation, tropical cyclones, extreme temperatures, and abnormal rainfall. “Products can be customised to offer coverage for most climate-related risks where data is available, ensuring comprehensive protection for crops, humans, and livestock,” he adds. Bajaj Allianz and HDFC ERGO, too, have agriculture-linked parametric products. Earlier this year, Bajaj Allianz introduced a comprehensive product that provides coverage for various risks, including property and industrial risks. We offer a comprehensive weather insurance policy that provides index-based insurance coverage from excess or deficit rainfall, temperature and wind -Parthanil Ghosh, Director &amp; Chief Business Officer, HDFC Ergo General Insurance Bajaj Allianz says this is a customisable product where terms such as premium and sum insured are determined based on the specific risk and customer requirements. “Claims assessment under this product relies on weather data sourced from the Indian Meteorological Department or other authorised agencies to measure deviations in weather parameters.” Parthanil Ghosh, Director &amp; Chief Business Officer, HDFC ERGO General Insurance, says the company offers a comprehensive weather insurance policy that provides index-based insurance coverage against excess or deficit rainfall, temperature, and wind. “It can also be expanded to cover the impact on livestock or milk production,” Ghosh tells BT. There are over two dozen parametric products in the Indian market, pegged at around $50-100 million. The global parametric market is worth about $14.8 billion and is expected to grow at a compound annual growth rate (CAGR) of 9.6% in the next five years. To The Rescue! Nagaland is the first state in India to have its entire area protected from rainfall using parametric cover. In any region where rainfall crosses the insured rainfall index, payout happens even if there is no damage to property or people. AXA’s Tomar explains that traditional insurance will not cover losses unless there is physical damage to an asset, even if a business suffers a non-damage loss due to climatic events. “This is where parametric insurance comes into play,” he says. Other states like Meghalaya, Assam, West Bengal, Odisha, UP, Punjab, and Kerala are also in talks with insurers and re-insurers to provide parametric cover. New insurance products are cropping up at a time when more and more restrictions are being put on traditional insurance products owing to changes in weather patterns. Parametric insurance, in a way, complements traditional insurance by providing coverage on top of the usual policies. According to industry players, a leading re-insurer said in April this year that if a client has a hydroelectric plant in Uttarakhand, then for any natural catastrophic event they are limiting the exposure to Rs 100 crore. “This re-insurer has put a limit, even if the hydroelectric plant is worth Rs 1,000 crore. This has opened a window for parametric insurance cover to step in. Now all these insurance companies are talking to re-insurers asking for a cover that sits on top of that traditional insurance cover of Rs 100 crore,” one of the industry players says, seeking anonymity. Additionally, there are products for the marginalised sections of society whose daily wages may be impacted in case of heavy precipitation or extreme heat. In Gujarat, the Atlantic Council’s Adrienne Arsht-Rockefeller Foundation Resilience Center, a platform that builds community resilience in the face of climate events, worked collaboratively with trade union Self Employed Women’s Association (SEWA) and Blue Marble, a re-insurer, to design the first-of-its-kind parametric insurance product under the state government’s Extreme Heat Protection Initiative to help women recover lost wages due to reduced or missed productive hours caused by climate-driven extreme heat. The pilot, launched last year, covers 21,000 female workers. “Our microinsurance is activated when specific temperature thresholds are met, which were set based on potential health risks. It was also designed with multiple payment periods rather than a single end-of-season payout, which is beneficial to the workers,” says Nidhi Upadhyaya, Deputy Director, Global Policy and Finance at the Adrienne Arsht-Rockefeller Foundation Resilience Center. As the frequency and intensity of adverse climate events have increased globally in recent years, industry players are calling for more customised products. The availability of data is crucial, but HDFC flags that the non-availability of adequate weather station infrastructure has been one of the major challenges faced during the implementation of the Restructured Weather-Based Crop Insurance Scheme (RWBCIS). RWBCIS is an insurance scheme that protects farmers from losses. Tomar also speaks about a ‘basis risk’, which refers to the discrepancy between the actual losses incurred and the index used to determine the payout. “The challenge is to design the index in a way that reduces basis risk. While it cannot be completely eliminated, it can be reduced or mitigated,” he adds. Reinsurance companies providing parametric insurance solutions rely heavily on the expertise of climate scientists to design these products. “Climate scientists not only analyse historical data but also provide projections,” Tomar explains. As of now, the parametric market, with its huge potential to close the climate adaptation gap, is set to expand further in India with businesses taking the challenges head-on. What needs to be watched is if more states will adopt it as well. @richajourno

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As climate chaos intensifies, businesses turn to parametric insurance: Will it be the ultimate hedge?

As extreme weather events rise, the demand for parametric insurance is growing among companies looking to hedge against climate-related risk in their portfolios. How successful will this be?