By Amitabh Dewan
As climate-related events such as floods, cyclones, droughts and heatwaves become more frequent, communities are looking for quicker ways to recover financially. This is where parametric insurance is emerging as an alternative to traditional insurance.
Unlike conventional insurance, which compensates for the actual loss suffered, parametric insurance pays a pre-agreed amount when a predefined event occurs. The focus is not on assessing damage after an incident but on verifying whether the agreed trigger has been met.
How parametric insurance works
Parametric insurance is based on measurable parameters such as rainfall, wind speed, temperature, flood levels or earthquake (peak ground acceleration). Before the policy is issued, the insurer and the customer agree on three things: the trigger event (strike parameter and exit parameter), the source of pre-agreed data that will verify the event, and the payout amount.
Parametric insurance is valuable for gig workers, industrial workers or those engaged in commercial farming who can lose income when extreme weather such as heavy rainfall and heatwaves prevents them from working. The cover will provide immediate financial relief and ensure those vulnerable receive timely support during weather-related disruptions.
How claims are settled
Claims under parametric insurance are considerably simpler than traditional insurance.
Once an event is triggered, payout amount and data source are agreed at the time of buying the policy, there is usually no need for lengthy surveys or physical loss assessments. Once the predefined parameter is breached and verified through the agreed data source, the claim process is initiated automatically.
Deciding the cover size
Businesses can choose a payout amount based on the likely loss they expect if the trigger event occurs. It is not always necessary to insure the entire value of the asset. The objective is to secure enough liquidity to manage the immediate financial disruption.
Advantages and limitations
The biggest advantage of parametric insurance is speed. Claims are settled based on objective data rather than damage assessment, reducing paperwork and uncertainty. The cover is also transparent because both the trigger and payout are defined upfront.
However, parametric insurance is not a replacement for traditional insurance. It covers specific events only. Traditional insurances offer much wider covers. Since payouts depend entirely on predefined triggers, there may be situations where the trigger is not met even though some loss has occurred. Similarly, the payout remains fixed even if the actual loss is higher or lower.
The writer is head, Large Corporate Risks, Policybazaar
Disclaimer: This article is based on a recent ITAT Pune ruling in a specific case. Judicial decisions are fact-specific, and their applicability depends on individual circumstances. Taxpayers should seek professional advice before relying on this ruling for their own cases.
Every financial journey has a turning point. What’s yours?
Financial Express is launching a new series highlighting real experiences with money, investments, and the taxman. Did a sudden tax rule catch you off guard? Did a piece of financial advice change your life? Your story could provide invaluable, practical lessons for thousands of fellow taxpayers. Share your experience with us. We respect your privacy: no stories will be featured without a direct conversation and your full consent. Thank you.
