India has seen its  first parametric cover for disaster financing in place as the country’s northeastern state of Nagaland  has recently signed an agreement with Tata AIG General Insurance, with Swiss as a reinsurer, to provide insurance protection through parametric  mechanism for this year's monsoon season .


The transaction provides parametric coverage for excess rainfall events that can lead to severe flooding in the state and is based on a geospatially gridded dataset whose precipitation levels are derived from satellite observations .


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.


However,the details of the cover, size, premiums and other terms and coniditions, are not yey known.   .


In addition to protecting the state treasury’s balance sheet, the transaction will enable Nagaland to build fiscal resilience against natural disasters.


With Swiss Re as its reinsurance partner,Tata AIG General Insurance Company has inked a Memorandum of Understanding with the Nagaland State Disaster Management Authority (NSDMA),


Agriculture constitutes about 70 per cent  of  Nagaland’s  economy, The state has high levels of humidity and 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.


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 coats 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.” 


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, executive vice president (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.”  


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.


What is parametric insurance?
At its core, parametric insurance is coverage that protects a customer against certain losses based on a verifiable event that causes indefinite loss.


The key difference between this type of coverage and any other traditional covers  is that it doesn’t cover the extent of a loss – known as indemnifying the insured – but pays out an agreed-upon sum based on the expected loss resulting from a trigger event.


In essence, this means that parametric insurance is a trade-off between the increased speed that cash is made available to customers and the irrefutable nature of the amount paid out.


A simple example is insuring against flight cancellation or delay.

If a flight leaves late, or not at all, a customer with a parametric policy can recoup some or all of the money near instantly, because the proof is easily obtainable.


But some of the more complex areas, like extreme weather or the wide range of risks in the corporate world, require in-depth risk modelling to effectively cover.