By Ankur Indrakush, CEO & Co-Founder of Plutas.ai
India is at the frontline of the global climate crisis. Repeated floods and cyclones to heat waves are not only increasing in frequency but also in magnitude. Not only in India, but across regions and countries, the climate crisis is a reality with its ugly manifestations every now and then. The impact on vulnerable groups, farmers, and small businesses is rising sharply. All this makes the requirement for financial protection more obvious and utterly necessary. However, the issue is not about intent but in crafting a financial architecture that can support systemic, simultaneous, and rapidly scaling climate risks.
Climate-linked insurance is a first for all, an ecospace which is of utmost importance but at the same time nascent and unexplored. While the challenges are many, financial companies are connecting and surely on the right path towards bridging the gap.
The Data and Pricing Challenge
Increase in climate related calamities is unprecedented, and hence teething troubles are anything but natural. The biggest challenge here is the unavailability of robust data and precisely correct pricing. Capital flows where the clarity is, but traditional insurance models rely on historical data that climate change has rendered unreliable. How can we price an “unprecedented” flood that now happens every few years?
In India, the northern states of Himachal Pradesh and Uttarakhand have seen more floods in the last three years than ever before. This is what drives global reinsurers to increase premiums or withdrawal coverage. The uncertainty is difficult to grasp; both for the insurer and those insured. Albeit without accurate and current data to model risk, capital cannot be placed with confidence, and this forms the first big bottleneck in financing resilience.
Systemic Risks and Capital Constraints
Unlike isolated incidents such as a factory fire, climate risks are becoming pervasive and interconnected. A single drought or heatwave can affect millions across an entire region. This correlation concentrates risk and strains the capital capacity of the reinsurance industry, pushing costs up. The result is a rapidly widening “protection gap,” where potential losses outstrip available capital, leaving no single entity in a position to bear the financial burden. So, while there is an absolute need for insurance for such a situation, the capital constraint too is a harsh reality that comes in the way of insurers coming onboard.
Technology – the Game Changer
Climate finance can only be unlocked in India if there is a fundamentally new approach underpinned by technology and innovation. Technological enhancements in the form of Artificial Intelligence, satellite imagery, and real-time data models drive the core of parametric insurance, turning uncertainty into measurable, verifiable risk. And as stakeholders are able to gather data with passing years, AI algorithms are bound to predict better and build models that can form the backbone with reliable insights.
Creating transparency, the technologies attract alternative sources of capital and restore confidence among investors and insurers alike. Technology alone can transform uncertainty into transparent, manageable and verifiable risks. The clarity that comes with data insights is the key to attracting new forms of capital.
The path ahead
The way forward is in combining technology with public-private collaboration and new financial instruments such as Insurance-Linked Securities (ILS). This is the right way to bridge the gap and move successfully towards climate-linked insurance.
Through automated, data-verified payouts, these instruments can become transparent and ultimately attractive to global capital markets. Investment in this kind of framework is more than just covering losses; it is a way to make the Indian economy resilient in the face of an uncertain climatic reality.