Lessons from India: how parametrics can help marginalised communities weather effects of extreme heat

Extreme heat is one of the deadliest climate risks, responsible for almost half a million deaths per year globally, writes Swiss Re’s Gerry Lemcke.

Beyond the impacts on worker health and well-being, extreme heat can cause a myriad of economic impacts – from affecting vital supply chains, to slowing down business operations and harming labour productivity. Globally, 675 billion hours are lost every year because of excessive heat and humidity, amounting to roughly 1.7 percent of global GDP.

Developing nations are the most exposed to climate shocks and chronic onset, and within those countries, women are the most impacted.

In India for example, around 90 percent of women workers participate in the informal employment sector in India and if they are unable to go out to work due to extreme heat conditions, they lose their daily wages.

In fact, when temperatures in Delhi hit 49ºC in May 2024, insurance payouts for lost income were made to over 46,000 women in Southeast Asia.

In this particular scenario, insurance payouts and a direct cash assistance programme were combined to supplement the income of women when it became dangerously hot. This somewhat novel parametric solution was designed specifically for the Self-Employed Women's Association (SEWA), but presents some important lessons for (re)insurers more broadly in terms of helping other marginalised communities reduce the burden of income losses from climate events.

How did the SEWA solution work in practice?

In the case of the India heatwaves, joining forces with Climate Resilience for All (CRA) and SEWA enabled us to create and implement a parametric insurance policy designed to cover a portion of the income lost by the members of SEWA when they are unable to perform their work due to extreme temperatures.

As ever, the challenge when it comes to extreme temperatures is that the perception of heat and its tolerance can be relative, with significant degrees of variation depending on the location. Local climate variations need to be reflected in the final design of any solution.

For SEWA, this is what drove the idea behind the parametric heat index cover’s structure, with the response being to use trigger thresholds that would be adapted to the local climatology. In essence, the historic temperature data from the reanalysis data set is used to calculate an individual percentile for each of the 23 participating cities/communities across northwestern India. This percentile (which is based on de-trended data) is then used as a trigger threshold.

The advantage of using a percentile as a threshold, as opposed to a fixed value, is that it reflects local climate peculiarities and provides an objective view of how heat can be perceived by individuals who may have adapted to the conditions typical for the respective regions. For example, a threshold value of 43.5°C might be suitable for a landlocked region, whereas coastline locations or higher altitudes might never reach such values and, accordingly, never trigger a payout.

Further, by using a percentile, the frequency of an expected payout, as per definition of the percentile itself, can be pre-defined. In case the product should trigger more or less frequently, the percentile can be adjusted downward or upward, helping strike a balance between the client need and the available budget.

For SEWA, the structure of the solution has proven to meet the criteria of an equal probability of receiving a payout irrespective of the local climatological peculiarities, with the result maximising the number of SEWA members that have received the benefit.

What does this mean for (re)insurers?

Any challenge brings opportunity for progress, and the India heatwaves truly serve to highlight the opportunity for (re)insurers to leverage parametric insurance solutions in strengthening resilience against heat extremes.

Instead of insuring customers based on the magnitude of the actual losses incurred, parametric insurance solutions insure customers based on the intensity or magnitude of the actual event (e.g. extreme heat impacting crop yields). By seeking to roll more tailored parametric solutions out to more communities across India and East and West Africa, (re)insurers can play a crucial role in addressing the risks of extreme heat and building climate resilience for vulnerable communities.

But (re)insurers cannot scale this vital work as needed in isolation. Engaging with governments to offer access to risk insights and modelling will be vital to helping us all to mitigate against and respond quickly to future instances of extreme heat.

Gerry Lemcke is head of product management at Swiss Re Public Sector Solutions.