BharatNotes What is Disaster Risk Transfer (Insurance)?
Disaster risk transfer is an ex-ante (pre-arranged) risk-financing approach in which the financial burden of a possible disaster is shifted, for a premium, to a third party such as an insurer, reinsurer or capital market. Instead of waiting for a disaster and then scrambling for relief funds, the exposed party — a farmer, a firm or a state government — locks in a contracted payout. The UNDRR frames it as part of a comprehensive risk-management strategy to reduce and prevent economic losses, and the Sendai Framework 2015-2030 (Priority 3) explicitly calls for disaster risk transfer, insurance and risk-sharing mechanisms.
Key Instruments
Disaster risk financing distinguishes between risk retention (reserves, contingency funds, contingent credit) and risk transfer. The main transfer instruments are:
| Instrument | How it works | Indian example |
|---|---|---|
| Indemnity insurance | Pays the assessed actual loss | General property/crop cover |
| Parametric insurance | Pays on a predefined trigger (e.g., rainfall mm), not assessed damage | Nagaland parametric scheme |
| Reinsurance | Insurers transfer part of their risk to reinsurers | Swiss Re, Munich Re, GIC Re |
| Catastrophe (CAT) bonds | Transfers risk to capital-market investors | Not yet sovereign-issued by India |
| Sovereign risk pools | Countries pool and diversify risk jointly | India not yet a member |
Significance for India
India is exposed to floods, cyclones, earthquakes, drought and landslides, with economic losses rising due to growth and rapid urbanisation. Swiss Re estimates uninsured losses of ~USD 32.94 billion against only ~USD 1.10 billion insured during 2018-22 (about 93% uninsured). Closing this protection gap shifts the fiscal load away from the SDRF/NDRF and reactive relief, gives governments and citizens faster, more predictable recovery funds, and reduces the developmental setback each disaster causes.
Current Status
- Pradhan Mantri Fasal Bima Yojana (PMFBY) — India's flagship crop-insurance scheme, launched 13 January 2016 — is the largest disaster risk-transfer programme. Since inception up to 30 June 2025, about 78.4 crore farmer applications were insured and roughly ₹1.83 lakh crore in claims paid (Govt. of India / PIB data). Farmers pay 2% (Kharif), 1.5% (Rabi) and 5% (commercial/horticultural) of the sum insured; governments subsidise the balance.
- Nagaland became the first Indian state to adopt parametric disaster insurance, piloting cover from 2021-23 (Tata AIG as insurer, Swiss Re as reinsurer) for excess-rainfall flooding, structured across six zones with stepped payouts. The scheme was later renewed with SBI General (reinsured by Munich Re and GIC Re), and the state processed its first parametric claim in 2025.
UPSC Angle
For Prelims, remember the distinction between parametric and indemnity cover and Nagaland's pioneer status. For Mains GS3, use risk transfer to argue for shifting India's disaster financing from reactive relief toward pre-arranged, market-based resilience — while flagging challenges such as low risk awareness, weak hazard data and underwriting capacity. It is a foundational concept underpinning questions on disaster management, agricultural distress and climate-adaptation finance.
