Financing Disaster Mitigation: Policies, Challenges, and Insurance Solutions in India

India faces a staggering range of natural hazards – from earthquakes and floods to cyclones and droughts. Every year, these disasters cause loss of life, damage to infrastructure, and setbacks to economic development. But how does India plan for, finance, and insure against such events? The answer lies in a combination of national policy frameworks, dedicated disaster response funds, and an evolving insurance ecosystem. Let’s break down each of these components.

India’s national policy on disaster management (NPDM) 🔗

The National Policy on Disaster Management (NPDM), approved by the Union Cabinet in October 2009, is India’s foundational document for handling disasters. It was framed under the Disaster Management Act, 2005, which itself was a landmark law that created a three-tier institutional structure for disaster management in the country.

The NPDM’s vision is to build a safe and disaster-resilient India through a proactive, technology-driven strategy rooted in prevention, mitigation, preparedness, and response. This marked a major shift from India’s earlier approach, which was largely reactive and relief-centric. The policy explicitly aims to move away from post-disaster relief towards pre-disaster planning and risk reduction.

Key institutional framework 🔗

Under the Disaster Management Act, 2005, India established the National Disaster Management Authority (NDMA) chaired by the Prime Minister, State Disaster Management Authorities (SDMAs) headed by Chief Ministers, and District Disaster Management Authorities (DDMAs) led by District Collectors. This structure ensures that disaster management responsibilities are distributed across all levels of governance.

The policy also led to the creation of the National Disaster Response Force (NDRF), a specialised force for disaster response. Since its establishment, the NDRF has rescued over 4.5 lakh people and trained around 40 lakh community volunteers across the country.

Core objectives of the NPDM 🔗

The NPDM covers a wide spectrum of disaster management activities – from institutional and legal arrangements to prevention, mitigation, preparedness, response, relief, rehabilitation, reconstruction, and capacity development. Its key objectives include promoting a culture of prevention and preparedness at all levels, encouraging mitigation measures based on technology and environmental sustainability, mainstreaming disaster management into development planning, and ensuring transparency and accountability through community participation.

The policy also addresses the needs of vulnerable groups – including women, children, elderly persons, and persons with disabilities – ensuring that disaster planning is inclusive. Community-based organisations, Panchayati Raj Institutions, and local bodies are central to the policy’s implementation model.

Gaps and evolving challenges 🔗

While the NPDM was progressive for its time, it has faced criticism for not keeping pace with emerging threats. The policy was formulated in 2009 and does not adequately address newer hazards like heat waves, cold waves, and climate-change-driven events. It also lacks provisions for recognising climate refugees. The Disaster Management Act was amended in 2025 to strengthen the institutional framework, financial mechanisms, urban disaster management, and accountability structures – addressing several of these shortcomings.

Financing disaster response in India 🔗

Effective disaster management requires robust financial mechanisms. India uses a structured system of dedicated funds – primarily the State Disaster Response Fund (SDRF) and the National Disaster Response Fund (NDRF) – to finance immediate relief after disasters.

State Disaster Response Fund (SDRF) 🔗

The SDRF, established under Section 48(1)(a) of the Disaster Management Act, 2005, is the primary fund available with state governments for responding to notified disasters. These include cyclones, droughts, earthquakes, floods, tsunamis, hailstorms, landslides, avalanches, cloudbursts, pest attacks, frost, and cold waves.

The Central Government contributes 75% of the SDRF allocation for general category states and 90% for special category states (North-Eastern and Himalayan states). The remaining share comes from the respective state governments. The annual central contribution is released in two equal instalments based on Finance Commission recommendations.

States also have the flexibility to use up to 10% of their SDRF for responding to localised disasters not on the central notified list, provided they have defined and notified such disasters with the approval of their State Executive Committee.

National Disaster Response Fund (NDRF) 🔗

The NDRF, constituted under Section 46 of the Disaster Management Act, supplements state resources when a disaster is classified as “severe” and the SDRF is insufficient. The entire NDRF corpus comes from the Central Government. Accessing NDRF funds requires a formal process: an Inter-Ministerial Central Team (IMCT) visits the affected state for on-the-spot assessment, its report is reviewed by the Sub-Committee of the National Executive Committee, and final approval is given by the High Level Committee chaired by the Union Home Minister.

It’s important to note that assistance from SDRF and NDRF is provided as relief, not as compensation for losses. This distinction matters – these funds address immediate survival needs, not long-term reconstruction or livelihood restoration.

The 15th Finance Commission and mitigation funds 🔗

A significant development came with the 15th Finance Commission’s recommendations. For the period 2021-2026, the Commission recommended a total allocation of Rs. 1,60,153 crore under the State Disaster Risk Management Fund (SDRMF). Of this, 80% (Rs. 1,28,122 crore) was earmarked for the SDRF and 20% (Rs. 32,031 crore) for the newly created State Disaster Mitigation Fund (SDMF).

Similarly, at the national level, Rs. 68,463 crore was allocated for the National Disaster Risk Management Fund (NDRMF), split between the NDRF (Rs. 54,770 crore) and the new National Disaster Mitigation Fund (NDMF) (Rs. 13,693 crore). This was the first time India allocated dedicated funds specifically for disaster mitigation at both national and state levels – a welcome move towards proactive risk reduction rather than only reactive relief.

The NDMF has earmarked funds for specific activities: assistance to drought-prone states, managing seismic and landslide risks in hill states, reducing urban flooding risk in major cities, and erosion mitigation measures.

The challenge of long-term reconstruction financing 🔗

While the SDRF and NDRF address immediate relief needs effectively, long-term reconstruction remains a challenge. In 2024, the government framed guidelines for a recovery and reconstruction funding window under NDRF/SDRF, requiring states to conduct Post-Disaster Needs Assessments (PDNA) before accessing reconstruction funds. This is a step in the right direction, but the scale of financing needed for reconstruction – rebuilding homes, restoring infrastructure, and reviving livelihoods – often far exceeds what these funds can provide.

The role of insurance in disaster risk transfer 🔗

Government funds alone cannot bear the full financial burden of disasters. Insurance is a critical risk transfer mechanism that can protect individuals, businesses, and governments from catastrophic losses. However, India faces a massive disaster insurance protection gap.

The scale of the insurance gap 🔗

According to Swiss Re Institute estimates, India’s natural catastrophe protection gap stood at approximately 95% in 2021, meaning more than 95% of property losses from natural disasters were uninsured. To put this in perspective, the 2001 Bhuj earthquake caused around USD 4 billion in economic losses, of which only USD 100 million was insured.

Property insurance penetration in India is strikingly low – estimated at just 0.07% relative to GDP. An estimated 84% of low- and middle-income individuals lack property insurance. Several factors contribute to this gap: low awareness, limited affordability, distrust in insurance companies due to past claim settlement delays, cultural reliance on government relief, insufficient data for accurate risk assessment, and poor insurance distribution networks outside urban centres.

Crop insurance: from mNAIS and WBCIS to PMFBY 🔗

Agriculture, being highly vulnerable to weather-related disasters, has been a major focus of India’s insurance efforts. Over the years, several schemes have been introduced to protect farmers from crop losses.

The Modified National Agricultural Insurance Scheme (mNAIS), introduced around 2010, was an improvement over the earlier National Agricultural Insurance Scheme (NAIS). It was based on actuarial premium rates and covered risks like prevented sowing and post-harvest losses. However, mNAIS suffered from high premium rates of 8-10%, capping of sum insured, and delays in claim settlement – often taking 6 to 12 months.

The Weather Based Crop Insurance Scheme (WBCIS) took a different approach by using weather parameters like rainfall, temperature, humidity, and wind speed as proxies for crop yield losses. This allowed for faster claim settlement since payouts were triggered by weather data rather than physical crop assessments. However, WBCIS had its own limitations, including basis risk – the gap between actual crop losses and what weather indices captured.

In 2016, the government launched the Pradhan Mantri Fasal Bima Yojana (PMFBY), replacing both NAIS and mNAIS. PMFBY addressed many earlier shortcomings: it removed caps on premium rates and sum insured, reduced farmer premium rates to just 2% for kharif crops, 1.5% for rabi crops, and 5% for commercial crops, with the remaining premium subsidised by central and state governments. The scheme also introduced technology – drones, satellite imagery, GPS, and remote sensing – for faster and more transparent crop damage assessment. Since 2020, enrolment has been made voluntary for all farmers, including those with crop loans.

Beyond crop insurance: property and catastrophe risk 🔗

While crop insurance has seen significant policy attention, property and catastrophe insurance remain severely underdeveloped. There is no dedicated legislation that mandates or standardises insurance coverage for losses from floods, earthquakes, landslides, or similar events. Suggestions to bridge this gap include making home insurance mandatory in disaster-prone regions, creating a national catastrophe risk pool for reinsurance support, and offering tax benefits on insurance premiums.

The Insurance Regulatory and Development Authority of India (IRDAI) and the NDMA presented an action plan in 2013 that included risk transfer solutions for individuals, businesses, state governments, and public utilities. More recently, the IRDAI has launched initiatives under its “Insurance for All by 2047” mission, including the Bima Trinity – Bima Sugam (a digital platform for insurance), Bima Vahak (women-centric insurance distributors in rural areas), and Bima Vistaar (a bundled insurance product for underserved populations).

The development of parametric insurance solutions is another promising direction. These products trigger automatic payouts based on predefined parameters (like earthquake magnitude or rainfall levels) rather than assessed losses, enabling much faster disbursement of funds after a disaster.

Connecting the dots: policy, finance, and insurance 🔗

India’s approach to disaster mitigation financing works on three interconnected levels. The NPDM provides the overarching policy framework that guides all disaster management activities. The SDRF, NDRF, and the newer mitigation funds ensure that governments at both state and national levels have dedicated financial resources for immediate response and, increasingly, for proactive mitigation. Insurance mechanisms aim to transfer residual risk to the private sector, protecting individuals and communities from financial devastation.

However, the system still has significant gaps. The relief-oriented nature of SDRF and NDRF means that long-term recovery and reconstruction funding remains ad hoc. The massive insurance protection gap leaves most Indians – especially in rural and semi-urban areas – financially exposed to disasters. And while policies like PMFBY have improved agricultural insurance penetration, the broader property and catastrophe insurance market remains undeveloped.

Closing these gaps will require a multi-pronged effort: stronger enforcement of building codes in hazard-prone areas, expansion of insurance distribution networks beyond urban centres, development of affordable and accessible insurance products, better disaster risk data and modelling, and sustained public awareness campaigns about the importance of financial preparedness against disasters.

What do you think? Should disaster insurance be made mandatory for properties in high-risk zones across India? And how can the government better balance the need for immediate relief with long-term reconstruction financing after major disasters?

References

1. https://nidm.gov.in/PDF/policies/ndm_policy2009.pdf
2. https://www.mha.gov.in/sites/default/files/NPDM-101209.pdf
3. https://www.insightsonindia.com/disaster-management/national-policy-on-disaster-management-2009/
4. https://ndmindia.mha.gov.in/ndmi/responsefund
5. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2080185
6. https://www.pib.gov.in/PressReleasePage.aspx?PRID=1947134
7. https://www.swissre.com/dam/jcr:595c5497-a367-404e-82e0-4ef673e9bd30/2024-01-sri-expertise-publicatoin-india-insurance-market.pdf
8. https://www.business-standard.com/finance/personal-finance/health-protection-gap-persists-in-india-40-crore-uninsured-report-123121400799_1.html
9. https://www.sbigeneral.in/pradhan-mantri-fasal-bima-yojna
10. https://pmfby.gov.in/pdf/New%20Schemes-english_.pdf