Page 115 - India Insurance Report 2023- BIMTECH

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harmonization of definitions and methodologies for data collection and analysis to improve access to
global (re) insurance markets, in terms of disaster risk assessment and modelling, affordable and
comprehensive insurance coverage of disaster risks, financial assistance and compensation for affected
individuals and businesses, and risk transfer mechanisms including catastrophic bonds and insurance for
management of fiscal risks. The DRRWG should play a significant role in directing capital flow towards
investments that make societies and economies more disaster resilient”. Dr. P K Mishra, Principal Secretary
to the Prime Minister (“How to meet a disaster”, Indian Express, 25 May 2023) has similarly echoed that
as the G20 provides a broader platform to drive global goals on disaster risk reduction, there is an
opportunity for it take the lead in the implementation of the Sendai framework over the next seven
years. Disaster risk financing, as Dr. Mishra puts it, will not be merely about the additional financial
resources; it will also include more efficient, effective, and predictable financial mechanisms.

‘The role of (re)insurers in mitigating risks is paramount, in providing financial protection against climate-
related losses, actively working to mitigate the impacts of climate change - assessing and quantifying climate
risks and evaluating the potential impacts of climate change on various sectors, including property, agriculture,
energy, and infrastructure. One of the core functions of (re)insurers is to transfer risk from policyholders to
themselves through insurance policies and reinsurance contracts. (Re)Insurers play a vital role in creating
disaster risk financing and supporting countries to structure customized financial protection strategies that
increase the resiliency of governments, industries and low-income populations. Parametric insurance and
weather derivatives have also been introduced by (re)insurers as an alternate risk transfer mechanism for
climate related risks. Weather derivative takes the form of forward contracts or options, and their value is
decided by a climatic index, e.g., temperature or rainfall. Parametric insurance products are index-based
solutions, and a pre-agreed pay-out is provided by (re)insurers if the mutually agreed climatic index is breached.
(Ré)Insurers actively invest in research and development to develop technologies and solutions that can
enhance risk assessment, modelling, and management. For example, (re)insurers are using satellite imagery,
remote sensing, and machine learning to assess climate risks with greater precision and accuracy. Global
(re)insurance industry is taking the lead in aligning their strategies and products with net-zero commitments,
Task Force on Climate-Related Financial Disclosures (TCFD) frameworks, and the UN Sustainable
Development Goals.’ (Reference – “The Crucial Role of (Re)Insurers in Managing Climate Change Risks”
by Prof Pratik Priyadarshi, Associate Professor, BIMTECH, and Pankaj Tomar, India Head- AXA Climate).

With a view to bolstering the supply side mechanism, the Indian insurance regulators must, in tandem with
the global (re)insurance industry and other stakeholders, establish a regulatory framework to enhance the financial
capacity of insurance companies to cover disaster losses. In global terms, most countries have gone for Risk-
based Capital (RBC) modelling, and the advanced countries have moved to economic capital practices. The
Insurance Regulatory and Development Authority of India (IRDAI) should have quickly moved capital solvency
rules from a standard formula to risk-based capital and not keep working for over a decade now, and correlate
the volatility on the balance sheets such as the correlation of catastrophe and cyber models to underwriting,
credit and market risks. This needs to be mandated along with risk-based pricing and assets & liabilities management.
The Capital markets regulator seeks higher disclosure from insurers looking to list and operate through it. India
should be seriously considering the implementation of a robust, risk-based capital supervisory framework that
achieves Solvency II (prudential regime in EU) equivalence to increase commercialization of the insurance
industry, necessitating better governance, prudence in reserving and shifting focus to profitability over premium
income accretion. Further, Insurance-Linked Securities (ILS), as instruments for disaster risk reduction, are both