Historic first in India
Insurance protection against natural catastrophes & disaster risks through parametric insurance
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India, one of Asia's largest economies and the world's second most populous country, has a serious challenge as incidents of natural catastrophes increased sharply in recent years. Exposed to hazards such as floods, earthquakes, storms, droughts and landslides, low insurance penetration in the market points to a large protection gap that leaves its people vulnerable. Floods in Chennai (2015), northern India (2018) and Kerala (2017 and 2018) have prompted IRDAI and the National Disaster Management Authority to devote efforts to boost insurance penetration.
In May 2020, a small but historic step has been taken in India's northeastern state of Nagaland to opt for disaster risk financing through insurance protection, which can lead to a big leap in the country's efforts to strengthen resilience.
With Swiss Re as its reinsurance partner, Tata AIG General Insurance Company Limited has inked a Memorandum of Understanding with the Nagaland State Disaster Management Authority (NSDMA), to provide insurance protection for this year's monsoon season. In addition to protecting the State treasury’s balance sheet, the transaction will enable Nagaland to build fiscal resilience against natural disasters.
Nagaland is one of the smallest states in India located to the east of Assam and west of Myanmar. Featuring a largely mountainous terrain where agriculture constitutes about 70% of its economy, Nagaland is exposed to heavy rains in the monsoon months of May to September. As a result, the state is susceptible to damage from heavy rainfall, windstorm/hailstorm, flood and landslides, particularly during the monsoon season.
The transaction provides parametric coverage for excess rainfall events that can lead to severe flooding. It is based on a geospatially gridded dataset whose precipitation levels are derived from satellite observations and rain gauges. The parametric structure is designed to cover the entire state of Nagaland through six distinct zones, with a stepped payout feature to ensure funds are allocated where losses occur and in proportion to the amount of recorded rainfall, to mirror its impact.
In March 2021, Swiss Re announced its commitment to an InsuResilience Solutions Fund co-funded project, which would support expansion and enhancement of the existing excess rainfall cover and development of a complementary earthquake cover. This public-private partnership project will help further strengthen the state’s climate resilience by enhancing its insurance protection against natural catastrophes. More information can be found here.
- Johnny Ruangmei, Officer on Special Duty at NSDMA, Government of Nagaland said, “The developmental building blocks and investment that the Government or community has put in for many years can be shattered in less than 15 seconds by a natural catastrophe. Disaster is no longer “IF” but “WHEN”. Therefore, investment in risk transfer is a prudent investment, cardinal to sustainable development”.
- Madhukar Sinha, EVP for Government & Rural Business at Tata AIG said, “We hope this unique initiative of Nagaland State Government would create awareness across the country on management of catastrophic risks through insurance. Since severity of catastrophic losses are very high, in my opinion, insurance is a far more superior and effective option for risk transfer than any other options available for the purpose. Tata AIG is committed to provide innovative insurance solutions on weather-related catastrophic risks.”
- G Satish Raju, Swiss Re said, "This is Swiss Re's first disaster risk financing arrangement in India. Nagaland is a first mover and this transaction marks a positive step towards strengthening India’s resilience to natural disasters. With tropical cyclones Amphan and Nisarga hitting the eastern and Western coasts of India in early 2020, the transaction serves as a timely model for other states looking to similar innovative re/insurance solutions that help protect their significant natural catastrophe exposures.”