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Thursday, April 22, 2021

After the chennai floods: Revisiting the Natural Catastrophe Pool

Chennai floods have exposed our financial unpreparedness against natural disasters and calls for a unified insurance coverage.

Written by George Mathew
Updated: December 15, 2015 2:04:36 am
City on its knees: Residential areas are seen surrounded by floodwaters in Chennai on Saturday. (Source: PTI) City on its knees: Residential areas are seen surrounded by floodwaters in Chennai on Saturday. (Source: PTI)

While the country has suffered heavily in terms of human fataliities and economic losses due to natural catastrophes like Chennai floods, a proposal by the insurance industry to bring the entire population and houses under insurance cover has been hanging fire for the last eight years. The proposal for an insurance catastrophe pool (INCIP) which would have mitigated the sufferings has been stuck with the government with no decision taken about charging of premium and the complex issue of implementing the scheme across the country.

Whenever a natural catastrophe strikes the country, the cry to form a Natural Catastrophe Insurance Pool (Nat Cat Pool) becomes louder only to fizzle out after a few months once normalcy returns. “For example, there were reports that the general insurance industry was in dialogue with the National Disaster Management Agency (NDMA) to form such a pool with the Insurance Regulatory and Development Authority (IRDA) regulatory support a year ago. Insurance is an issue for the poor class of citizens and small traders who cannot afford to buy it. Hence, a Nat Cat Pool is ideally for protecting this vulnerable class. For the insurers, a pool can be viable only if the premiums are adequate,” said KK Srinivasan, former Member, IRDA.

Over 10,000 claims have already reached insurance companies after the Chennai floods played havoc with life and property, leading to losses of around Rs 1,500-2,500 crore to insurers. More claims are expected to come in the coming weeks. However, thousands of poor citizens and petty traders who can’t afford to buy insurance cover have lost everyting in the floods. Who will compensate for their losses?

In 2010, after cyclone Nilam hit Tamil Nadi, the insurance industry and the finance ministry joined hands to set up an exclusive catastrophe pool to cover the losses that occur in natural disasters. The proposal submitted by the industry through the General Insurance Council, the representative body of the general insurers envisages a pool on the lines of the Terror Pool and Third Party Motor Pool (now converted into a Motor Third Party Declined Risk Insurance Pool). As per the proposal, there should be a standalone policy — with a minimum cover of Rs 1 lakh for small premium —covering all natural catastrophe perils with the benefit of cover going to those or their kin who are directly affected by the disaster. The plan which was developed with the active involvement of National Disaster Management Authority (NDMA) and GIC Re has been floated by the insurance regulator since at least 2007, but has got deferred over administrative issues, said an official involved in the process.

Once implemented, a large percentage of house owners across India will have to start paying a premium for the insurance cover with the balance being financed by the Centre or states. The proposal for the INCIP could cost up to Rs 5,000 crore if applied across India but will bring down the present undefined bill to rebuild lives after the catastrophes, providing a big comfort to citizens, the government and the insurance sector.

R Chandrasekaran, secretary general, General Insurance Council, said, “the proposal is with the government. It’s needed. At the current level of low insurance penetration, Indian insurers have capacity to retain the risks to their balance sheets. Also the reinsurance can help in dealing with these risks.” Currently, India doesn’t have a single cover for all catastrophic incidents. IRDA is considering such a policy as a separate category.

Two years ago, non-life insurance companies had presented a concept paper on catastrophe insurance to the NDMA. It cited the need for a pool to deal with losses from natural disasters. In absence of such a pool, both insurers and reinsurers have to bear the cost, leading to a big hit on their profitability.

Besides, the government spends taxpayers’ money to rebuild the devastated areas which can be easily paid by the insurers. However, there has been no consensus between insurers and the NDMA on who would fund the process and how the pool would function. Though the paper was subsequently presented to the finance ministry, no formal decision was taken on the matter.

An official privy to the discussions said that this may be only available for free for those below poverty line, while others have to bear a cost. Also, all areas may not be covered and only those prone to natural disasters would be given the cover. If implemented, India will join several countries like Turkey, Norway and others which have set up such funds to share the cost of reconstruction after large scale disasters. Cities like New York too are now planning similar policies to cover its inhabitants. Typically, policies taken out by individuals do not cover such calamities, excluding them under the clause “act of God”.

No protection for poor

Heavy rains and flash floods ravaged Chennai with initial estimates suggesting a loss of Rs 15,000 crore. However, insured losses could be a fraction of this amount, possibly less than 10 per cent of the total losses. This means poor people end up suffering huge losses which, otherwise, would have been paid up by insurers.

Insurance against such catastrophes is not an issue for the medium and large-scale business or industry or the middle and upper class citizens. Insurance against such catastrophes is not an issue for the medium and large-scale business and industry and the middle and upper class citizens. But the fact remains that many of them don’t go in for insurance .., he said. In dealing with Chennai floods, the country is back again to the age-old model of government funding ‘reliefs’ to the victims of the natural disaster.

“Since poorer classes cannot afford to pay premium, the government may have to fund the premium (for Nat Cat Pool) . However, for the government, funding premiums will still be far cheaper —and budgeted for — than shelling out unbudgetted reliefs when a calamity strikes,” Srinivasan said.

India witnessed the world’s largest and third largest catastrophes of 2014 — Cyclone Hudhud and the Kashmir floods respectively — in terms of overall damage and losses. Hudhud led to a loss of $7 billion and an insured loss of $530 mn and losses in J&K floods were $5.1 bn and insured loss of $330 mn. Flash floods in Uttarakhand took 5,500 lives and cyclone Phailin led to huge losses in 2013. When the cyclone Hudhud hit Andhra Pradesh, insured losses amounted to just 7.5 per cent of the total loss. J&K flood insured losses were just 6.5 per cent of the total loss. In comparison, the proportion of insured losses to overall losses was 52.5 per cent for winter damage in Japan in February 2014, 74 per cent for storm damage in USA in May, and 80 per cent for severe storm damage across western Europe in June 2014, says Prudential Insurance Brokers.

Had the government implemented the INCIP policy, Chennai citizens would have got claim for damage. As per the proposal, the sum insured for kutcha construction was proposed at Rs 50,000 per house and Rs 10,000 for contents and for pucca construction at Rs 100,000 for house and Rs 25,000 for contents. For loss of lives, the sum insured was proposed at Rs 1,00,000 per life (maximum 4 per family).

Nature’s Fury

J&K FLOODS: In September 2014, monsoon rains in Jammu and Kashmir in India and the neighbouring region in Pakistan resulted in the worst flooding in 60 years. At least 665 perished and over 200 000 houses were destroyed. Together, the total losses in India and Pakistan were $5.9 billion, and insured losses were at least $ 0.2 billion. The total losses from the destruction of housing in India were at $4.4 bn.

CYCLONE HUDHUD: The biggest storm of the Pacific and Indian Ocean season was Cyclone Hudhud in October. Hudhud made landfall near Visakhapatnam in Andhra Pradesh with winds of up to 200 km/124 miles per hour and a storm surge of up to three metres in some areas. The total losses were estimated at $ 7 billion, the largest of all natural catastrophes in the world in 2014. However, the insured losses were a fraction of the total at just $ 0.6 billion.

SUMMER HEAT: At the close of the first half of the year 2015, there was an exceptionally strong heatwave in India and Pakistan that caused the deaths of 3,600 people.

CHENNAI FLOODS: Heavy rains and flash floods ravaged Chennai city with initial estimates suggesting a loss of Rs 15,000 crore. However, insured losses could be a fraction of this amount, possibly less than 10 per cent of the total losses.

INDIA PRONE TO STORM ACTIVITY: In Asia, the bulk of the severe convective storm activity occurs in India and Bangladesh, most often in the pre-monsoon period from March-May. The storms are classified by wind speed, with speeds of 42 meters per second/151 km per hour or higher referred to as tornadoes, and below that as “nor’westers”. The four deadliest tornadoes on sigma records were all in Bangladesh and the fifth and sixth in India, says a Swiss Re study.

INSURED LOSSES IN 2014: Global insured losses from natural catastrophes and man-made disasters were $ 35 billion in 2014, down from $ 44 billion in 2013 and well below the $ 64 billion —average of the previous 10 years. Around 12,700 people lost their lives in all disaster events, down from as many as 27,000 in 2013, making it one of the lowest numbers ever recorded in a single year, Swiss Re says.

ECONOMIC LOSSES: Globally, total economic losses from all disaster events were $110 billion in 2014, where Asia contributed 47 per cent to the total global losses. Out of the total loss, only $ 5.2 billion worth of losses were insured in Asia.

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