Natural calamities abound in India. Flood, cyclones, and landslides routinely destroy lives and capital.
Kerala is only the most recent episode. The worst flood witnessed by the state in a century killed over 400 and displaced over 700,000. The economic loss is estimated to be as high as INR20,000 crore.
Now, guess how much of these losses are insured? Not even 10%.
Speaking to ET Prime, AV Girija Kumar, chairman and managing director, Oriental Insurance Company (OIC), says, “As on August 31, all the four state-run general insurance companies have received around 19,500 claims related to the Kerala floods, the claim value of which is estimated to be INR1,400 crore.” Of this, OIC has received 2,931 claims estimated at INR165 crore.
“Though it's a provisional figure as claims are still pouring in, our experience from past incidents like the Mumbai and Chennai floods, the 2004 tsunami, and the 2014 Hudhud cyclone, shows that the actual liability payable to customers comes to 22%-25% of the claims made by them. Out of that, we will have a substantial amount of reinsurance support, with a hit of around INR175 crore on our balance sheet,” says Girija Kumar.
According to the National Disaster Management Authority (NDMA), the average annual flood damage from 1996 to 2005 was INR4,745 crore compared to INR1,805 crore, the corresponding average for the previous 53 years.
On average, every year due to floods, 75 lakh hectares of land is affected, 1,600 lives are lost, and the damage to crops, houses, and public utilities is to the tune of INR1,805 crore. The frequency of major floods is more than once in five years. Similar is the case with other calamities such as cyclone, earthquake, landslide, and drought.
India isn’t alone in suffering heavy catastrophe-induced loss. A report by reinsurance-research body Swiss Re Institute estimates that global economic losses from natural catastrophes and man-made disasters in the first half of 2018 were USD36 billion. Of the total global economic losses during this period, USD20 billion were insured.Ignorance is expensive
Ritesh Kumar, managing director and CEO of private-sector non-life insurer HDFC Ergo, says, “For most of catastrophic losses in India, the ratio of insured to economic losses is less than 10%.”
The simple reason behind the gap is the lack of awareness. General-insurance penetration in the country is at 0.93% — ironic at a time when the Centre is running a host of state-sponsored insurance programmes.
A few states like Maharashtra, Gujarat, and Rajasthan do have state-insurance funds to fight such emergencies. The only problem is that these funds are meant to insure the state’s assets and not the average citizen.
OIC’s Kumar, who is also the chairman of Gipsa (General Insurance Public Sector Association, a group of the four public-sector general-insurance companies — New India Assurance, United India Insurance, Oriental Insurance, and National Insurance), puts it differently. He says the central government and some states have insurance funds that get accumulated on the yearly basis.
However, a single incident of calamity dries up the entire fund. “If each one of us has the awareness to get insurance cover, it will result in a huge fund, which can easily help fight calamities,” Kumar says.Well-developed model overseas
In other markets, such calamities are usually fought with ‘parametric covers’. A parametric cover does not indemnify the pure loss, but ex ante agrees to make a payment upon the occurrence of a triggering event like a catastrophe.
In simpler words, if a particular area is earthquake-prone, the insurer prepares a package based on the intensity of quakes. State governments in India could look at buying such cover, says Ritesh Kumar.
GM Balachandra, retired director at United India Insurance, who worked in Australia during his stint as general manager with GIC Re, says, “First, no country or state provides catastrophe cover to its citizens as a whole, until and unless there is a case of ‘market failure’, or a situation in which the allocation of goods and services by a free market is not efficient, often leading to a net social-welfare loss.
“Second, every house or property abroad has a geocode tag to show its location. It is nothing but [a set of] GPS coordinates.
“Then comes catastrophe modelling by insurers, which includes the hazard model, exposure-data model, vulnerability model, and the finance model.”
However, Balachandra rues that Indian insurers don’t do any sort of modelling and are dependent on outside agencies like geospatial and software solutions company RMSI. They also bank on the private-sector firm Skymet, he adds.
ET Prime spoke to a senior official of a global reinsurer with presence in India to understand the kind of practices being followed in other Asian countries.
“We work with governments on public-access programmes and help them close protection gaps,” says the official. “Some of this discussion is also happening with many Asian countries, including India, because these countries regularly get ravaged by natural catastrophes and also have large protection gaps.”
The official adds that his firm can offer an index-linked insurance product, which means the claims will be settled by directly linking them to the losses incurred. It is an efficient way for claims payment.
In the absence of states buying catastrophe cover, lenders ask industries to buy all-perils or business-interruption covers before applying for a loan. Again, the actual practice varies from policy to policy and insurer to insurer.
Even an all-perils policy may exclude some events or contain specific limitations, so one may not be fully insured for a major loss. In that case, one may go for catastrophe cover as an add-on to the policy by paying a little more.
Fire and motor policies come with ‘add-on’ catastrophe covers. Those who get these covers will get their claims settled in full in case of a natural calamity. But the problem is that few people opt for cover against excess water damage, a common occurrence in natural calamities. The bottom line
The fact is, states are simply not in a position to go for catastrophe coverage, as it is costly and they don’t have the funds for it. Costs of catastrophe cover for states will come down only when the risk is spread realistically, volume is high, and there is proper underwriting.
R Chandrasekaran, secretary general of General Insurance Council, an industry body of non-life insurers, says every natural disaster is proving the point that economic losses are very high, whereas insured losses are very low. “It shows that insurance consciousness is not there in the country,” he says.
It is unfortunate that while digital payments are being seen as a proxy for increasing financial awareness, at a deeper level, India is living on hope, prayer, and, of course, donation drives.
Kerala is only the most recent episode. The worst flood witnessed by the state in a century killed over 400 and displaced over 700,000. The economic loss is estimated to be as high as INR20,000 crore.
Now, guess how much of these losses are insured? Not even 10%.
Speaking to ET Prime, AV Girija Kumar, chairman and managing director, Oriental Insurance Company (OIC), says, “As on August 31, all the four state-run general insurance companies have received around 19,500 claims related to the Kerala floods, the claim value of which is estimated to be INR1,400 crore.” Of this, OIC has received 2,931 claims estimated at INR165 crore.
“Though it's a provisional figure as claims are still pouring in, our experience from past incidents like the Mumbai and Chennai floods, the 2004 tsunami, and the 2014 Hudhud cyclone, shows that the actual liability payable to customers comes to 22%-25% of the claims made by them. Out of that, we will have a substantial amount of reinsurance support, with a hit of around INR175 crore on our balance sheet,” says Girija Kumar.
According to the National Disaster Management Authority (NDMA), the average annual flood damage from 1996 to 2005 was INR4,745 crore compared to INR1,805 crore, the corresponding average for the previous 53 years.
On average, every year due to floods, 75 lakh hectares of land is affected, 1,600 lives are lost, and the damage to crops, houses, and public utilities is to the tune of INR1,805 crore. The frequency of major floods is more than once in five years. Similar is the case with other calamities such as cyclone, earthquake, landslide, and drought.
India isn’t alone in suffering heavy catastrophe-induced loss. A report by reinsurance-research body Swiss Re Institute estimates that global economic losses from natural catastrophes and man-made disasters in the first half of 2018 were USD36 billion. Of the total global economic losses during this period, USD20 billion were insured.Ignorance is expensive
Ritesh Kumar, managing director and CEO of private-sector non-life insurer HDFC Ergo, says, “For most of catastrophic losses in India, the ratio of insured to economic losses is less than 10%.”
The simple reason behind the gap is the lack of awareness. General-insurance penetration in the country is at 0.93% — ironic at a time when the Centre is running a host of state-sponsored insurance programmes.
A few states like Maharashtra, Gujarat, and Rajasthan do have state-insurance funds to fight such emergencies. The only problem is that these funds are meant to insure the state’s assets and not the average citizen.
OIC’s Kumar, who is also the chairman of Gipsa (General Insurance Public Sector Association, a group of the four public-sector general-insurance companies — New India Assurance, United India Insurance, Oriental Insurance, and National Insurance), puts it differently. He says the central government and some states have insurance funds that get accumulated on the yearly basis.
However, a single incident of calamity dries up the entire fund. “If each one of us has the awareness to get insurance cover, it will result in a huge fund, which can easily help fight calamities,” Kumar says.Well-developed model overseas
In other markets, such calamities are usually fought with ‘parametric covers’. A parametric cover does not indemnify the pure loss, but ex ante agrees to make a payment upon the occurrence of a triggering event like a catastrophe.
In simpler words, if a particular area is earthquake-prone, the insurer prepares a package based on the intensity of quakes. State governments in India could look at buying such cover, says Ritesh Kumar.
GM Balachandra, retired director at United India Insurance, who worked in Australia during his stint as general manager with GIC Re, says, “First, no country or state provides catastrophe cover to its citizens as a whole, until and unless there is a case of ‘market failure’, or a situation in which the allocation of goods and services by a free market is not efficient, often leading to a net social-welfare loss.
“Second, every house or property abroad has a geocode tag to show its location. It is nothing but [a set of] GPS coordinates.
“Then comes catastrophe modelling by insurers, which includes the hazard model, exposure-data model, vulnerability model, and the finance model.”
However, Balachandra rues that Indian insurers don’t do any sort of modelling and are dependent on outside agencies like geospatial and software solutions company RMSI. They also bank on the private-sector firm Skymet, he adds.
ET Prime spoke to a senior official of a global reinsurer with presence in India to understand the kind of practices being followed in other Asian countries.
“We work with governments on public-access programmes and help them close protection gaps,” says the official. “Some of this discussion is also happening with many Asian countries, including India, because these countries regularly get ravaged by natural catastrophes and also have large protection gaps.”
The official adds that his firm can offer an index-linked insurance product, which means the claims will be settled by directly linking them to the losses incurred. It is an efficient way for claims payment.
In the absence of states buying catastrophe cover, lenders ask industries to buy all-perils or business-interruption covers before applying for a loan. Again, the actual practice varies from policy to policy and insurer to insurer.
Even an all-perils policy may exclude some events or contain specific limitations, so one may not be fully insured for a major loss. In that case, one may go for catastrophe cover as an add-on to the policy by paying a little more.
Fire and motor policies come with ‘add-on’ catastrophe covers. Those who get these covers will get their claims settled in full in case of a natural calamity. But the problem is that few people opt for cover against excess water damage, a common occurrence in natural calamities. The bottom line
The fact is, states are simply not in a position to go for catastrophe coverage, as it is costly and they don’t have the funds for it. Costs of catastrophe cover for states will come down only when the risk is spread realistically, volume is high, and there is proper underwriting.
R Chandrasekaran, secretary general of General Insurance Council, an industry body of non-life insurers, says every natural disaster is proving the point that economic losses are very high, whereas insured losses are very low. “It shows that insurance consciousness is not there in the country,” he says.
It is unfortunate that while digital payments are being seen as a proxy for increasing financial awareness, at a deeper level, India is living on hope, prayer, and, of course, donation drives.
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