Why in the news? 

In 2023, natural disaster losses hit $280 billion, with only $100 billion insured, highlighting a need for innovative insurance solutions amid rising extreme weather events.

Present Method of Disaster Risk Reduction

• Indemnity-based Insurance Products: Indemnity-based insurance products require a physical assessment of damage after a disaster to determine the payout amount. For example Health Insurance, Motor Insurance and Travel Insurance.

Challenges:

• Verification Issues: When large-scale calamities strike, especially in economically disadvantaged areas, it is difficult to verify losses due to the lack of records and widespread destruction.
• Delays in Payouts: The need for physical assessment can cause delays in providing financial assistance to the affected individuals and communities.
• Insurance Gap: There is a significant gap in insurance coverage between developed and developing economies, leaving many vulnerable populations without adequate protection.

Changing course and the associated limitations:

• Parametric insurance: Payments are made based on predefined parameters of weather events (e.g., rainfall exceeding 100 mm per day for two consecutive days, specific flood levels, wind speed).The payouts are made without the need for physical assessment of losses, enabling quicker disbursements.

Examples:

• Disaster-prone Island Countries: Many have adopted parametric insurance for climate adaptation, moving away from risk retention models. For example, Fiji launched its first parametric insurance product in 2021
• Morocco received $275 million in parametric insurance after a 6.8 magnitude earthquake, arranged with the help of the World Bank.
• India has initiated crop insurance (e.g., Pradhan Mantri Fasal Bima Yojana and the Restructured Weather Based Crop Insurance Scheme).

Associated Limitations

• Current Focus: Primarily used for low-frequency, high-impact disasters like earthquakes, cyclones, and hurricanes.
• Data and Infrastructure Requirements: There is challenges related to developing and maintaining the necessary infrastructure for data collection and monitoring can be challenging, especially in developing regions.
• Affordability and Accessibility issues: It demands high premiums can still be a barrier for economically disadvantaged communities.

What can be done to ensure effectiveness? (Way Forward)

• Precise Thresholds and Robust Monitoring: Establish clear, accurate parameters for insurance triggers and implement reliable monitoring systems to track these parameters effectively.
• Transparent Bidding and Experience Sharing: Follow a transparent bidding process for price discovery and facilitate the exchange of best practices and lessons learned between governments.
• Widespread Payout Systems and Household Premium Support: Develop comprehensive systems for distributing payouts and promote long-term premium payment by households, leveraging tools like Aadhaar-based payment dissemination.

Mains PYQ: 

Q Describe various measures taken in India for Disaster Risk Reduction (DRR) before and after signing ‘Sendai Framework for DRR (2015-2030)’. How is this framework different from ‘Hyogo Framework for Action, 2005’? (UPSC IAS/2018)

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