Insurers providing weather-index or parametric insurance policies in India are facing heavy losses due to the impact of cyclones on agricultural regions. Weather-index insurance firms may see loss ratios as high as 100% due to heavy crop losses, according to a report.
An article in India’s Business Standard discusses the possibility that a number of insurers offering policies linked to weather variables may find themselves facing loss ratios of 100%, due to the impact of cyclones and the losses they have caused to agriculture and crops in parts of the country.
Cyclone Phailin alone, which struck the Indian region of Orissa and Andhra Pradesh in October, is expected to create a significant hike in weather-index insurers loss ratios. Extensive damage was caused both to rice paddy crops as well as seasonal vegetables by the storms rainfall which is expected to trigger mass payouts to microinsurance customers with weather-linked policies.
Weather-index crop insurance schemes had performed well through most of 2013, due to lower tha average monsoon rainfalls, but the impact of cyclone Phailin and also the more recent cyclone Helen are expected to wipe out that good performance.
Weather-index insurance policies are typically small and sold to local farmers to provide them with a cash payment after inclement weather or disaster strikes their crops. The trigger for the policies are linked to actual weather conditions, measured at reference weather stations, making them parametric in nature.
The introduction of these weather-index insurance schemes over the last few years have provided much-needed payouts after heavy monsoon seasons in India, but this is the first year where cyclones appear to be responsible for the bulk of losses.
The loss ratio for insurers may deteriorate further as another cyclone, Lehar, is currently heading for the same region of Andhra Pradesh. Insurers offering weather-index products in the region could find themselves on the hook for even more losses if the weather measurements from this storm breach policy triggers.