While the world has gone through a series of catastrophic events due to climatic changes; India has also been a victim of the same. Added to Covid 19, the country lost over 1,56,000 lives in less than a year, and 2021 began with the Uttarakhand calamity causing a plethora of damage and destruction.

Catastrophic risk insurance in India cannot be predicted or reined in. The recent natural disasters harmed insurance companies, as well as the insured. It not only affected property, motor, and life insurance segments but significantly impacted crop insurance.

Given the destructive nature of catastrophic events; insurance bodies and companies have started making efforts to increase insurance penetration into the smaller cities and towns. Though efforts are being made, there is a need for a structured approach and increased digitisation in the sector. Every individual and insurance company needs to realise that perils like flood, earthquake, drought protection are not restricted to any particular city or state and can affect the remotest places. Below are some suggested ways which can help in mitigating insurance risk during natural calamities:

Adoption of parametric solutions: Higher adoption of parametric covers can help meet the challenge of catastrophic events. Parametric solutions offer a platform to guarantee a direct payout, after a catastrophic event and protect against unpredictable but potentially devastating risks, which general insurance packages fail to provide. Nagaland is India’s first state, which adopted a parametric insurance solution, against excessive rainfall. Payouts have been assigned, in proportion to the anticipated amount of rainfall, which resounds to the expected loss measures.

National catastrophe insurance pool: There is a need to reassess the natural catastrophe insurance pool owing to the increase in economic losses, due to the series of natural calamity events. A pool-like structure will help in offering natural catastrophe insurance covers that will protect property from floods, earthquakes, landslides amongst others.

Increased use of digital insurance: There are around 700 million people who can buy insurance, but no one to sell the product. Due to its complex product structures and physical, branch-led distribution model, insurance is highly under-penetrated in the country, especially in Tier 2 and 3 cities. There is a need to increase insurance penetration in smaller towns and cities and build awareness about the importance of insurance policies against natural disasters. Digital led insurance is the way forward, which will help people understand and get access to insurance coverage, even in the remotest towns and cities.

Catastrophic modelling in insurance: This is especially important for reinsurance players. Spending on catastrophic modelling will help reinsurers study better the risks associated with floods or earthquakes. It is a combination of science and technology, engineering knowledge, and statistical data for over 100 years, which helps evaluate expected natural calamities and perils. Reinsurers need to spend on the right kind of modelling, so that they can structure their business in a way that risks are mitigated, capital is deployed, and insurance companies do not go in panic mode when a calamity occurs.

While these perils are outside the control of human beings, unpredictable and unpreventable, no economy should ignore the provision for combating financial losses due to natural calamities or catastrophic events. To effectively mitigate the risk, the insurance sector plays the most significant part in helping people get back on their feet.

The author is CEO and Co-Founder at Renewbuy Insurance

DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.