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Building resilience in India

Source(s):  Swiss Reinsurance Company (Swiss Re)

By Thomas Haller

Climate change is resulting in more frequent and extreme weather events that put a strain on state budgets around the world.

Climate change is resulting in more frequent and extreme weather events that is putting a strain on state budgets around the world. 

In 2019, global economic losses from disaster events (both natural and man-made catastrophes) totalled USD 144 million,1 equivalent to over 10.6 billion Indian rupees.2 Swiss Re Institute has also found that 70% of economic losses caused by natural catastrophes over the past decade were uninsured, with 90% of these losses in Asia.

In May 2020, Cyclone Amphan in the Bay of Bengal caused economic losses of USD 13 billion, over 950 billion Indian rupees.3 This was the most destructive tropical cyclone India has ever experienced, and insured losses are expected to be just a fraction of the economic losses due to the region's low insurance penetration.4

Investing in risk transfer

Many countries do not have sufficient protection against the financial impact of natural disasters. Failure to close this protection gap can drain state and national budgets, and divert funds away from other critical areas of need. One way to build protection is to transfer the financial risk of natural catastrophes to third parties in the private sector, such as insurers. 

This form of risk protection provides governments with the funds to respond quickly to disasters and helps strengthen their financial resilience; thus avoiding the need for budgets to be adjusted, debt to be raised or donor money to be requested. For instance, authorities can use these funds to cover emergency response costs, offer bridging loans, tax relief, and other prompt support to small businesses that are likely to be hit hard by natural calamities.

Public-private sector cooperation is key in this equation with both parties playing a complementary role. The public sector has the breadth of distribution and ability to create a conducive operating environment, whilst the private sector brings products, technology and expertise. Implementation of a successful risk transfer program requires a concerted and co-ordinated effort by all stakeholders, and includes:

  • Clarity and alignment of objectives – Upfront agreement on the perils in scope and stakeholder roles enables optimal design of a program that meets user needs.
  • Sustainable funding and distribution mechanisms –Commitment to a risk transfer program requires the necessary funds to be ring-fenced so resilience can build year on year. Payouts also need to be distributed quickly and reliably, and be free of the uncertainty that comes with complex approvals and processes.
  • Systems to regularly capture data – Limited availability of data can be a significant barrier to a sustainable program. Meaningful data (for example rainfall data from weather stations), that adjusts with economic and social needs is critical.
  • The right partners – International re/insurers bring knowledge and the experience of other risk transfer programs, as well as technologies and datasets that can be leveraged   
  • Conducive regulatory environment - that attracts the right public/private participants, facilitates prompt distribution of payouts and ensures a sustainable program

The protection gap in India

Incidents of natural catastrophes in India has increased sharply in recent years, taking a toll on state and national government coffers. Hazards such as floods, earthquakes, storms, droughts and landslides have exposed a large protection gap that leaves its people vulnerable. In recent years, floods in Chennai (2015), northern India (2013) and Kerala (2018 and 2019) have prompted the authorities to seek solutions to increase resilience to shocks and reduce budget uncertainty.

In 2020, heavy rainfall resulted in flood-related fatalities and thousands of people displaced in states such as Andhra Pradesh, Gujarat and Telangana - where over 60 deaths were reported.

Recognising the severity of the situation, India’s Finance Commission for 2020-2021 recommended that Indian states set up a mitigation fund, to supplement the existing National and State Disaster Relief Funds and promote local-level mitigation activities. These are in addition to existing funds set aside for relief activities, and recognises the importance of pre-event (ex-ante) financing.

The Commission also recommended that both central and state governments focus on debt consolidation and comply with the fiscal deficit and debt levels, as per their respective Fiscal Responsibility and Budget Management Acts. A well-designed risk transfer solution, or insurance program, can help governments to achieve these twin goals.

Governments taking proactive steps to mitigate the fiscal impact of natural disasters

The small north-eastern Indian state of Nagaland has been proactive in implementing protection against excessive rainfall. A largely mountainous terrain, where agriculture makes up about 70 per cent of its economy, Nagaland experiences heavy rains in the monsoon months of May to September. This makes the state highly susceptible to damage from heavy rainfall, wind, flood and landslides. In 2018, heavy flooding affected 50,000 families in 538 villages, destroyed roads and took 12 lives.

In a pioneering move, Nagaland’s government wisely sought insurance protection as a way to build resilience, working with Swiss Re and Tata AIG General Insurance Company Limited. Johnny Ruangmei, Officer on Special Duty at Nagaland State Disaster Management Authority (NSDMA), Government of Nagaland explains the need for such precautions: “The developmental building blocks and investment that the Government or community has put in for many years can be shattered in less than 15 seconds by a natural catastrophe. Disaster is no longer “IF” but “WHEN”. Therefore, investment in risk transfer is a prudent investment, cardinal to sustainable development”. 

The insurance solution provides NSDMA with parametric cover for excess rainfall events that can lead to severe flooding. This means that a cash payout is triggered by an agreed event, rather than waiting for an assessment of loss - which can take weeks or sometimes months after a catastrophic natural event.

Satellite observations and rain gauges are used to assess rain across the entire state of Nagaland through six distinct zones. Pay outs are allocated in proportion to the amount of recorded rainfall, which mirrors the anticipated levels of loss.

In adopting the parametric solution, Nagaland is a first mover in this space, and is an encouraging step towards strengthening India’s resilience to natural disasters. With tropical cyclones Amphan and Nisarga hitting the eastern and Western coasts of India in early 2020, Nagaland’s progressive approach to financial protection serves as a timely model that other states can emulate as they seek to protect themselves from future shocks.

We look forward to seeing other states in India adopt similar measures, and forming effective partnerships to build their resilience  before the next disaster strikes.



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  • Publication date 06 Jan 2021

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