Flood insurance: How to protect your home and business from rising risks

Flooding continues to wreak havoc across Andhra Pradesh and Telangana. Gujarat saw similar devastation due to heavy rains between August 20 and 29. Every year, states like Assam, Odisha, Uttarakhand, and Himachal Pradesh are hit by floods, leading to immense property damage. The financial burden of such destruction can sometimes push individuals and businesses towards bankruptcy.

How can you protect yourself if flooding is common where you live? The answer is insurance.

Are there specific insurance policies for flood damage?

There are no exclusive policies that cover only flood-related damage. However, flood protection can be found within broader insurance policies. "Flood insurance is available through Standard Fire & Special Perils Policy and Householders Insurance Policy," says Sandeep Katiyar, co-founder and CFO at Finhaat. "Fire and Perils insurance covers damage caused by various events like riots, strikes, floods, storms, and cyclones."

Individuals and institutions can opt for these policies. STFI (Storm, Tempest, Flood, and Inundation) is a named peril in standard Irdai products like Bharat Udyam Suraksha Policy, Bharat Sookshma Udyam Suraksha, and Bharat Griha Raksha Policy. Katiyar explains that these products are designed to protect against various natural disasters, including floods.

What is STFI?

STFI is an add-on that extends your fire insurance policy to cover additional natural calamities such as storms and floods. While the main focus of fire insurance is on fire-related damages, an STFI cover ensures protection against other disasters like storms and floods, which can strike at any time.

Protecting commercial property

Beyond the coverage offered by the government, protecting commercial properties like shops, offices, or industrial units requires comprehensive insurance. "Many property insurance plans can be enhanced with a flood coverage add-on, providing protection against flood-related damages, waterlogging, and other water-related incidents," says Sajja Praveen Chowdary, head of PolicyBazaar for Business.

Key insurance plans with flood coverage include:

* Standard Fire and Special Perils Policy (SFSP): Protects commercial buildings, equipment, and stock from various risks, with the option to add flood coverage.

* Shopkeeper’s Insurance Policy: Designed for small shop owners, this policy covers property and stock, with an option for flood insurance.

* Office Package Policy: Offers comprehensive coverage for office premises and equipment, with flood protection to maintain business operations.

* Industrial All-Risk Policy: Provides broad coverage for industries, including flood-related damages.

What about home insurance?

Homeowners have access to the Bharat Griha Raksha policy, a standard home insurance policy launched under the direction of Irdai. "This policy offers coverage for up to 10 years and includes automatic protection for both the building and its contents, up to 20% of the building's insured value.," says Suryanarayanan V, Managing Director at Chola MS General Insurance.

"For example, under the Centre's affordable housing scheme, houses valued between Rs 15 lakh to Rs 25 lakh are automatically covered for general contents like appliances," he explains.

These home insurance policies cover a wide range of risks, including damage from floods, storms, and cyclones. They not only protect against structural damage but also cover additional expenses like repainting due to watermarks from heavy rains. Premiums vary based on factors like location, property type, building age, and construction material.

However, in some cases, assessing damage after a flood can be challenging, making claim settlements difficult. "For such situations, an alternative product, parametric flood insurance, has emerged. "Parametric insurance operates on predefined parameters, and when those are met, payouts are triggered immediately," explains Katiyar.

Unlike traditional insurance, which requires assessing the damage after an event, parametric insurance is based on measurable metrics like rainfall levels or wind speed. When these predetermined thresholds are exceeded, the policyholder receives compensation without needing to assess individual losses.

"Parametric insurance fills the gap between increasing flood risks and the limits of conventional insurance. Instead of indemnifying the actual loss incurred, parametric products offer payouts when predefined thresholds, such as rainfall or heat index, are exceeded. This makes the claims process faster and more transparent," says Katiyar.

How does parametric insurance work?

Parametric insurance operates by using predetermined metrics, like cumulative rainfall or wind speed, to trigger payouts. This method bypasses the need for individual loss assessments, allowing funds to be disbursed quickly.

For example, a parametric policy for floods caused by heavy rainfall might be structured around cumulative rainfall data. If the rainfall in a region exceeds a set threshold within a certain timeframe, the insured parties receive compensation. The payout increases with the level of rainfall up to a predefined limit, providing timely financial support without needing to assess physical damage.

Relatively new, parametric is available in India.

"We have offered our clients the product for excess rainfall. This product was designed to protect against risks of low warehouse occupancy arising out of possible excess or deficient rainfall, impacting agri - output. This initiative covered warehouses spread across 17 states," Katiyar explains.

The growing importance of flood insurance

"With climate change accelerating, the frequency and severity of floods have increased worldwide. Cities have expanded into high-hazard flood zones by 184% since 1985, according to the World Bank, exposing more people to flood risks. In India, floods have caused an average of $18 billion in economic losses annually over the past five years," notes Chowdary.

He also points out that businesses need to rethink their risk management strategies. "Property insurance covering flood risks and other disasters is a critical component of comprehensive coverage, helping businesses mitigate financial losses from increasingly unpredictable weather patterns."

Recently, India's ministry of finance instructed public sector insurance companies to ensure swift claim settlements for those affected by the floods in Andhra Pradesh and Telangana.

"The insurance companies have been instructed to ensure swift claim settlements by organising special camps and easing claim processes to provide relief to those affected," the ministry said in a post on X.

In addition, insurance companies have been asked to widely advertise the contact details of nodal officers, making it easier for policyholders to get assistance during this difficult time.