The Growing Economic Impact of Floods in India
India continues to face devastating consequences from natural disasters, particularly floods. In 2024, states like Assam, Kerala, Himachal Pradesh, and Tripura suffered severe socio-economic and ecological losses due to incessant rains. Even now, parts of Gujarat, Andhra Pradesh, and Telangana are grappling with widespread flooding, leading to loss of lives, destruction of livelihoods, and significant infrastructural damage.
With the frequency of natural disasters increasing annually, policymakers across the globe are exploring financially sustainable risk mitigation models to minimize the financial strain on public funds and provide effective relief for such inevitable disasters.
Global Examples of Risk Mitigation Models
Sovereign climate and disaster insurance have been highly effective in several countries for climate adaptation. Successful examples include disaster risk pools formed under public-private partnerships, such as the South East Asian Disaster Risk Insurance Facility for flood risk and the Caribbean Catastrophe Risk Insurance Facility for risks related to tropical cyclones and earthquakes. Other countries, such as the Philippines and China, have implemented their own risk mitigation programmes. For instance, the Philippines’ Government Service Insurance System Programme covers losses to government assets caused by major typhoons and earthquakes. Meanwhile, China’s Residential Earthquake Insurance Pool provides coverage for earthquake-related risks.
These disaster insurance models are typically developed based on thorough assessments of risk, the targeted beneficiaries, and priority areas requiring protection.
Challenges in Developing Insurance Models for Disasters
Developing a disaster insurance programme in emerging markets, including India, presents several challenges. These include issues like low income, affordability concerns, mistrust of insurers, unsupportive regulatory frameworks, and the absence of political will. The dependence on humanitarian assistance and social safety nets has further reduced political initiatives toward adopting climate and disaster insurance.
India’s Disaster Insurance Scenario
India has taken significant steps towards climate change adaptation, especially in the agriculture sector, with programmes like the Pradhan Mantri Fasal Bima Yojana and the Weather Based Crop Insurance Scheme. However, there is no dedicated insurance programme for natural calamities like floods.
According to a 2023 report by the State Bank of India, India’s estimated economic loss due to floods ranges between ₹10,000 crore and ₹15,000 crore, with only around 8% of these losses covered by insurance. The government allocates funds in advance for natural disaster relief, with ₹68,463 crore earmarked for the National Disaster Relief Management Fund (NDRMF) and ₹1,60,153 crore for the State Disaster Relief Management Fund (SDRMF) for the 2021-22 to 2025-26 period. However, the rising cost of floods highlights the need for a new financial framework.
A New Risk Mitigation Framework?
Given the increasing frequency of natural calamities, policymakers in India must consider a new risk mitigation framework that goes beyond existing disaster relief funds. A potential solution could be a public-private partnership (PPP) model based on the level of risk and the vulnerable groups in society. This model would complement existing arrangements by taking on a larger share of the burden, ensuring faster payouts and better post-disaster responses.
Potential Models for India
One viable option for India could be establishing a parametric index-based insurance model. Unlike traditional insurance, this model offers faster payouts by linking settlements to specific weather indices, such as average rainfall or earthquake magnitude. While this model has challenges, such as “basis risk” where a specific parameter is not met, several pilot programmes across Indian states have shown promise.
Another option is forming regional catastrophe pools for states that face similar risks, such as floods or cyclones. This approach would diversify risks and provide a more extensive risk cover at better rates, attracting more insurance companies to participate.
Conclusion
Regardless of the model chosen, India needs to rethink its disaster risk mitigation strategies to complement existing frameworks. By developing a financial risk mitigation model for natural disasters, India can safeguard its economy while adapting to climate change and its increasing frequency of weather catastrophes
