Parametric insurance is emerging as an innovation in the agricultural insurance space. Unlike traditional crop insurance, it provides a more flexible, faster, and targeted risk management solution.
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However, its adoption among Indian farmers remains limited.
Sandeep Katiyar, Co-Founder and CFO at Finhaat, explains how parametric insurance differs from traditional crop insurance and its potential to transform farmers’ resilience to extreme weather events.
What sets parametric insurance apart?
Traditional crop insurance offers generic coverage, applying the same risk and benefits to all farmers.
“In parametric insurance, one can define risk and coverage to their specific needs,” says Katiyar.
This customisation allows farmers to address unique risks, such as untimely rain during harvest or high temperatures during sowing, rather than generic perils like droughts or floods covered under conventional policies.
Katiyar highlights another critical distinction: “Parametric insurance does not indemnify actual physical damage. Instead, payouts are triggered when pre-defined parameters, such as rainfall levels or temperature thresholds, are exceeded.”
This approach simplifies claims and ensures faster settlements.
He adds, “The claim process is faster and more transparent, given the parameters are measurable and objective.”
Faster recovery from extreme weather events
Farmers often struggle with delayed payouts under traditional insurance schemes.
Parametric insurance addresses this gap by offering quicker compensation.
Katiyar explains, “Our index-based insurance product covers essential risks like excess rainfall, complementing existing traditional insurance solutions.”
This complementary nature helps expand the scope of insurability to include hard-to-insure risks.
Challenges in adoption
Despite its benefits, the adoption of parametric insurance among Indian farmers, particularly in rural areas, remains low.
Katiyar identifies several barriers:
- High distribution costs for reaching remote farmers.
- Limited availability of products from insurers.
- Data challenges for perils like frost, which are crucial for triggering payouts.
- Low awareness and trust among farmers further hinder adoption.
Yet, Katiyar is optimistic: “With advancements in technology and better data collection, parametric insurance adoption is expected to grow. It holds the potential to provide a more resilient risk management solution.”
Comparing premiums with traditional insurance
When it comes to premiums, Katiyar clarifies that direct comparisons between parametric and traditional insurance are not straightforward.
“The coverage and product structuring differ, so the premiums vary accordingly,” he says.
