As climate change intensifies and extreme weather events become more frequent, innovative insurance solutions like index-based insurance are emerging as crucial tools to support vulnerable populations and mitigate financial losses.
In the western region of India, Ahmedabad, a heatwave with temperatures exceeding 43°C persisted for almost a week starting from May. 19. Most workers in this area are day laborers who face severe difficulties in earning a livelihood if they cannot work due to the heat. In response to this situation, local women’s labor unions and climate organizations have taken action. They have introduced a “heatwave insurance” that provides a partial day’s wage as insurance payout if the temperature exceeds 40°C.
According to Bloomberg News, about 50,000 female workers in India have enrolled in this heatwave insurance. Just last month, over 46,000 people in 22 regions of India received more than $340,000 in insurance payouts.
As the world grapples with climate change, interest in “index-based insurance” is growing. Index-based insurance products offer fixed payouts when certain metrics like temperature, rainfall, or snowfall exceed or fall below predefined levels, irrespective of actual damage.
While these products may seem like promotional tools to attract customers, they are deemed beneficial for vulnerable groups heavily impacted by climate change. In South Korea, voices are growing for the government and local authorities to collaborate with insurance companies to introduce index-based insurance as part of mutually beneficial financial strategies.
According to Custom Market Insights, a global market research firm, the parametric insurance market that includes index-based insurance was approximately $15.2 billion in 2022. The firm forecasts that it will grow to $35.6 billion by 2032.
In recent years, various index-based insurance products have been launched. In May. 2023, the UK introduced its first heatwave insurance for dairy farmers, which pays out when summer temperature and humidity exceed certain levels. Canada offers insurance to canola farmers that pays $5 to $100 per acre (4㎡) if a heatwave occurs.
Also in Japan, Sumitomo Life, in collaboration with SoftBank, introduced a micro-insurance in 2022 that covers treatment and hospitalization costs for heatstroke for a premium of 100 yen ($0.63). Sompo Japan, Japan’s largest non-life insurance company, sells special riders to personal health insurance policies covering heatwaves damages.
Index-based insurance is gaining attention as extreme weather events become more frequent due to climate change. This type of insurance can help mitigate the significant annual damages caused by these events. The development of such products has become easier with the improvement of precise weather forecasting through satellites.
In S. Korea, insurance products such as disaster insurance that compensates for agricultural damage and policies that cover climate-related illnesses are available. However, these are not classified as index-based insurance because the payouts depend on actual damages. In contrast, index-based insurance provides fixed payouts regardless of whether any damage occurs.
Moreover, experts suggest that the unique characteristics of index-based insurance could support vulnerable populations. It could provide payouts to day laborers who are unable to work due to record-breaking heatwaves or to individuals suffering from heat-related illnesses who cannot access medical services.
