Farm insurance: Time for climate-linked bulk payouts

India's agriculture sector employs nearly half of its population and accounts for about 18% of the country's gross domestic product (GDP).

- SHUBHA BHANU & VINEET SINHA

It relies on smallholder farmers, representing around 86% of all farm holdings in India. These farmers and other vulnerable communities at the bottom of the economic pyramid suffer the most from increasingly erratic weather.

Recent news reports indicate that the Indian government plans to design a nationwide climate-linked insurance programme. This initiative of 'parametric insurance,' a form of coverage under which payouts are made if a specific event occurs rather than to compensate for actual losses suffered, arrives at a particularly crucial moment. The government's decision would offer India a data-driven and transparent mechanism that protects vulnerable communities from climate-induced losses-which have been escalating. Under a parametric model, insurance payouts would be triggered once specific climatic thresholds are breached.

Smallholder farmers worldwide struggle to insure themselves against risks to safeguard their livelihoods. High premium costs, tiresome application and claim processes, limited transparency around indemnity terms and historically low claim settlement rates are some key barriers to adoption. All these have contributed to farmers' reluctance to buy policies and eroded their trust in traditional indemnity-based crop insurance models. In contrast, parametric insurance offers objectivity, simplicity, transparency and certainty of settlement. Underwriters and administrators spend less effort and money to process claims.