Parametric insurance, a relatively new concept in India, is gaining attention for its potential to address specific risks faced by farmers. However, its adoption among Indian farmers remains limited due to several barriers. Sandeep Katiyar, Co-Founder and CFO at Finhaat, sheds light on how parametric insurance differs from traditional crop insurance and the advantages it offers in building resilience against extreme weather events.
What is Parametric Insurance?
Parametric insurance is a customized insurance solution that focuses on specific, measurable risks, unlike traditional crop insurance, which provides generic coverage for widespread risks like droughts or floods.
Key Features of Parametric Insurance
- Tailored Risk Coverage
- Farmers can define coverage for specific risks, such as untimely rain during harvest or high temperatures during sowing.
- This customization makes parametric insurance highly flexible for addressing unique local risks.
- Pre-Defined Parameters for Payouts
- Instead of compensating for actual physical damage, payouts are triggered when pre-set conditions (like rainfall levels or temperature thresholds) are met.
- This eliminates lengthy claim assessments.
- Faster and Transparent Claim Settlements
- The use of measurable parameters ensures quick payouts, reducing delays typically faced with traditional insurance schemes.
- According to Katiyar, “The claim process is faster and more transparent, given the parameters are measurable and objective.”
Faster Recovery from Extreme Weather Events
Traditional insurance schemes often fall short in providing timely payouts, leaving farmers vulnerable. Parametric insurance bridges this gap by ensuring quicker compensation.
- Index-Based Insurance Products
Katiyar explains:“Our index-based insurance product covers essential risks like excess rainfall, complementing existing traditional insurance solutions.”
- Broader Scope of Insurability
Parametric insurance expands the scope to include hard-to-insure risks like frost or unseasonal rain, which are typically excluded under conventional policies.
Challenges in Adoption
Despite its benefits, the penetration of parametric insurance in rural India remains low. Katiyar highlights the key barriers:
- High Distribution Costs
- Reaching remote farmers significantly increases operational costs.
- Limited Availability of Products
- Few insurers currently offer parametric insurance products.
- Data Challenges
- Reliable and localized data for specific perils, like frost, is often unavailable or inadequate.
- Low Awareness and Trust
- Farmers lack knowledge about parametric insurance and are skeptical about its benefits, further hindering adoption.
Premium Comparison with Traditional Insurance
Direct comparisons between parametric and traditional insurance premiums are complex due to differences in coverage and product structuring.
- Parametric premiums are typically risk-specific and based on measurable parameters, making them more flexible but sometimes higher than generic policies.
- Traditional insurance tends to offer standardized premiums for broader coverage.
Looking Ahead: The Potential of Parametric Insurance
Advancements in technology and improved data collection systems are expected to address the current barriers to adoption. Katiyar remains optimistic: “With advancements in technology and better data collection, parametric insurance adoption is expected to grow. It holds the potential to provide a more resilient risk management solution.”
Conclusion
Parametric insurance offers a customizable, efficient, and transparent alternative to traditional crop insurance. By addressing specific risks and ensuring faster payouts, it has the potential to revolutionize agricultural risk management in India. However, overcoming challenges like distribution costs, data availability, and low awareness is critical for its widespread adoption. With continued innovation, parametric insurance could become a cornerstone of resilience for Indian farmers in the face of climate uncertainties.