As India battles deadly heat waves, can insurance offer relief?

As deadly heat waves sweep the globe, a new initiative in India is experimenting with parametric heat insurance, in what experts hope will prove an innovative financing model to help climate-vulnerable communities mitigate losses from extreme heat. Run in partnership between the nonprofit Climate Resilience for All and the Self Employed Women’s Association, or SEWA, a women’s labor union in India, the heat insurance scheme was piloted this summer and aims to protect workers against heat-induced financial losses. With climate change set to increase both the frequency and severity of heat waves, experts are increasingly turning to insurance to provide essential financial protection for the most vulnerable — but emphasize that risk-transfer tools should not replace other forms of development assistance, and need to be combined with risk reduction measures if they are to remain sustainable in a warming climate. “I don't want to convey the sense that [disaster insurance] is the solution to everything,” said Ekhosuehi Iyahen, secretary general of the Insurance Development Forum, a public-private partnership driving collaboration between the insurance industry and key development institutions. “But it can be used to address a very pressing need that many communities are currently dealing with.” Vulnerable communities exposed Humanitarian financing has historically focused on mobilizing large sums of money after disasters occur. But the promised relief is often slow to materialize, delaying rehabilitation efforts and making spending less cost-efficient, Iyahen said. “We could do a much better job if we just spent a little bit more time putting money ahead of these disasters,” she said. Parametric insurance is one way to do this. Unlike indemnity insurance, which pays out for specific losses, parametric insurance payouts are triggered automatically once predetermined thresholds are crossed. This negates the need for insurers to authenticate claims, facilitating faster payouts and helping disaster-impacted communities get back on their feet more quickly. But insurance coverage in most low- or middle-income countries is low. Global reinsurer Swiss Re estimates for example that the natural catastrophe protection gap — the level of economic loss not covered by insurance — in India is 95%, making it one of the highest in the world. The collaboration between SEWA and Climate Resilience for All aims to change that. In one of several experiments with parametric disaster insurance in India, it offered heat insurance to 50,000 SEWA members, many of whom work as outdoor laborers with little protection from the heat. “They are reporting miscarriages, dizziness,” said Kathy Baughman McLeod, CEO of Climate Resilience for All. “They have burns and blisters from using tools that aren’t made for the heat they are being used in.” Most of the women work in the informal sector with no workplace protections, forcing them to choose between income loss and exposure to dangerous levels of heat in the summer. Despite “doing everything they know how to do” to provide financial stability for their families, said Baughman McLeod, “the one thing that pushes them into poverty … is heat.” With the subcontinent predicted to experience a sixfold increase in the number of heat waves under a 2 degrees Celsius model of global warming, trying to roll out a comprehensive and sustainable insurance scheme has often felt like “a race against time,” she added. Northern India has witnessed record-breaking heat waves this summer, with temperatures in many cities consistently exceeding 40 C. Of the 50,000 women insured under the scheme, 92% have already received a payout. The financial protection has enabled the women to continue paying for essentials such as food and school fees even when they were unable to work, Baughman McLeod said. But it also helped them to avoid vicious debt cycles and potentially exploitative situations, and retain “self-respect, dignity, credit worthiness — status in the community,” she said. “Isn’t that all we want — for women to have choice and power and opportunity?” Centering the needs of vulnerable communities and “trying to unpack what matters the most to them” was an essential component of the scheme, Iyahen said. She called it “pioneering” in demonstrating “the innovation that can take place when we apply insurance thinking and principles to real development challenges and targeted at communities that one would think ordinarily are not reachable.” The challenge now is to work out how to expand the initiative into other regions. As foreign aid budgets have shrunk and donor countries rethink the efficacy of their development spend, Iyahen said she has seen increasing interest from partners in exploring how insurance can be used to meet development goals. At the 27th U.N. Climate Change Conference, the Group of Seven leading economies launched the Global Shield initiative which would combine subsidized insurance with preapproved disaster funds for the most climate-vulnerable countries. Last year, Ghana became the first country to submit a request for funding, after an evaluation process with national stakeholders. But some activists have expressed concerns that wealthier nations could seek to position the Global Shield as a substitute for a loss and damage fund. But Iyahen emphasized that disaster insurance should be seen as a financing tool to complement other funds that compensate for noneconomic losses, such as loss of culture, or the impact of slow-onset disasters. “I really want to avoid the sense that insurance is being put out there to replace obligations that have not been met,” she said. “What we want to see happen is greater investments.” Complex hazards, missing data, and a race to understand heat Despite the increasing interest in parametric disaster insurance, insurers and development agencies have been slower to take up the mantle on extreme heat. “The problem with the tropical countries is that we believe that heat is something that we are used to,” said Abhiyant Tiwari, lead climate resilience and health consultant at Natural Resources Defense Council India, pointing out that heat is not a nationally notified disaster in India. Insufficient data has also proven a barrier. Parametric insurance relies on complex, data-driven calculations to determine trigger thresholds, but this data is lacking in many LMICs — especially when it comes to heat. “Defining a death or morbidity because of heat is a diagnosis by exclusion,” Tiwari said. And the data that does exist is not always an accurate depiction of the on-the-ground reality. Meteorological data, for example, does not necessarily reflect the temperature of extremely localized work conditions. The physiological impact of heat on the body is also complicated to predict, said Tiwari, and needs to take into account multiple parameters such as nighttime temperature, humidity and heat load, rather than just the maximum daytime temperature. “We have lots of parametric insurance for assets, physical things. The difference here is that it’s the human body,” Baughman McLeod said. “We don’t understand it. We don’t have all the data we need.” In the future, Climate Resilience for All plans to use emerging technologies to collect more accurate, localized data, and incorporate metrics such as nighttime temperature into insurance algorithms. But there are still “a lot of gaps to fill,” Baughman McLeod admits. The quest for better data demonstrates that the role of insurance schemes goes beyond just filling a liquidity gap and could also help to fill an information gap by “crystallizing what those risks and exposures are,” Iyahen said. In other words, a greater presence in the insurance industry could in itself help to define and reduce risk overall. Risk reduction, not just risk transfer Overall risk reduction needs to be the primary goal in a warming world, experts agree. “One of the things that we have learnt is that insurance alone is not the solution,” Baughman McLeod said. “The size and scope of extreme heat is so epic and ubiquitous that no one can just transfer [the risk] — we have to reduce it.” Currently, the SEWA heat insurance premiums are being subsidized through philanthropy. But Baughman McLeod is confident that in the future the scheme’s precise targeting, combined with a social protection layer of cash transfers during summer to help the women mitigate heat impacts, will allow the insurance to stand on its own. Tiwari agrees that the focus needs to be on longer-term mitigation. He was involved in designing India’s first Heat Action Plan in Ahmedabad City, which uses a color-coded early warning system to disseminate alerts via SMS and radio and helps hospitals to prepare ahead of hot days. The initiative, which has since been rolled out across other cities in India, is estimated to avert over 1,100 deaths in Ahmedabad each year. But Heat Action Plans in India are just advisories, Tiwari said, with no legal backing. The effects of heat are also multifaceted, affecting multiple sectors of the economy — from water and electricity demand to health and educational achievement. “It’s a complex hazard compared to others,” he said, requiring extensive coordination between government departments. Tiwari advocates for the installation of a chief heat officer in each city, who is empowered to act under the law. “A single expert who can coordinate all the actions,” he said, could help to “ensure that whatever advisories, policies to protect the workers from the heat, are being implemented on the ground.” Similarly, the insurance industry would benefit from country risk officers who could oversee and manage risks, Iyahen said. An expert with a comprehensive understanding of the data and local context could help to drive innovation in insurance products, she said, adding that risk reduction and management “is intrinsically linked to the availability of insurance.” But like Baughman McLeod, she acknowledged that we are running out of time. As climate change increases the likelihood and unpredictability of extreme weather events, insurance premiums will increase to unsustainable levels unless the underlying risks are managed. “If we don't get a handle on it, we will have a world that is uninsurable. And a world that is uninsurable is a world that is uninvestable,” she warned. The broader impacts on development could be catastrophic. “Capital will not flow where it does not understand the risk,” Iyahen said.