From earthquakes to floods: Why high-risk zones need parametric insurance now

While a moderate earthquake with a 4.2 magnitude jolted the Leh region of Ladakh on 1 April evening, causing concern among residents, a powerful 7.7-magnitude earthquake struck central Myanmar recently, causing widespread devastation.

In Mandalay, Myanmar's second-largest city, the Sky Villa Condominium—a 12-story residential building—partially collapsed, trapping numerous residents and resulting in multiple casualties. This tragic event highlights the critical importance of disaster preparedness and the role of insurance mechanisms, such as parametric insurance, in mitigating financial losses from unforeseen natural disasters.

Parametric insurance, also known as index-based insurance, is a coverage model where claim payouts are triggered based on predefined, measurable parameters for events rather than traditional loss assessments. "Under this arrangement, the insurer and the policyholder agree on a specific parameter—such as earthquake magnitude, wind speed, heat temperature degree or rainfall level—that, when met or exceeded, triggers an automatic pre-decided amount claim payout," says Gurdeep Singh Batra, Head – Property UW (E&S), Risk Engg, Global Accounts and Coinsurance at Bajaj Allianz General Insurance Company.

Unlike traditional insurance, which involves assessing individual losses, parametric insurance operates on pre-set trigger points. It assumes that when an event reaches a certain intensity, financial losses are highly likely. This model enhances transparency, ensures faster claim settlements, and provides immediate financial relief to the insured, making it particularly effective for disaster recovery and business continuity.

Exclusions

Under a parametric insurance policy, the terms and conditions are mutually agreed upon by both parties—the insurance company and the insured. Key elements, such as the peril covered, pay-out amounts, the pre-agreed index or parameter, and the competent authority responsible for measuring the index or parameter, are all determined at the commencement of the policy. "Any exclusions would be events or perils that do not meet or exceed the pre-agreed index or parameter, as defined in the contract and explicitly outlined in the policy," said Batra.