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In the wake of the natural disaster in Uttarakhand, the proposal for 'catastrophe insurance' is in spotlight. Early this year, non-life insurance companies had presented a concept paper on catastrophe insurance to the National Disaster Management Authority (NDMA). The concept paper highlights the need for a pool mechanism to deal with losses from catastrophic events. In the absence of such a pool, both insurers and reinsurers have to bear the cost, leading to a big hit on their profitability.
However, it is still stuck as a concept because there has been no consensus between the insurers and NDMA on who would fund the process and how the pool will function.
Officials from the general insurance sector said that while they had presented their case to the finance minister, a formal decision is yet to be taken.
A senior official of a public general insurer said that the model of insurance in this category, means of settling claims, reimbursements to NDMA and other authorities are areas are being debated upon. "The main areas that are being discussed include who would fund the process and formation of the pool, which are the categories of population that would be covered and whether to have this cover applicable across India or only in those regions prone to such natural calamities."
He added while earlier, it was proposed to have separate covers for people below and above the poverty line, this was scrapped later.
According to industry experts, the General Insurance Council and NDMA would have to discuss each of these issues in detail and decide on the nature and pricing of this cover. They added it would take at least 8-12 months for it to be implemented.
In India, while there are covers to protect property and life from incidents such as fire, floods and earthquake, there is an absence of a 'natural catastrophe cover' to cater to the needs of people. India, along with Bangladesh and Sri Lanka, faced an estimated economic loss of Rs 1,517.1 crore in 2012 from natural disasters including floods and Nilam Cyclone, according to Aon Benfield's Annual Global Climate and Catastrophe Report.
While both the General Insurance Council and Insurance Regulatory and Development Authority (Irda) have made efforts to set up this pool, a formal notification giving a guidance for its implementation has not yet been given. In fact, former Irda chairman J Hari Narayan had mentioned catastrophe insurance (and pool formation) as one of the unfinished agendas of his tenure.
Reinsurance is also a critical issue, which has dissuaded the industry from taking further steps in this direction. The CEO of a private general insurance firm explained that at least 60-65 per cent of the risks would have to be reinsured, to enable them to provide cover. "Since the risks associated with this segment are very high and we do not have the pricing and pool mechanism in place, reinsurers are not very comfortable in taking a big exposure in this segment in India, at present," said the official.
A pool-based concept for natural catastrophe events was first mooted by finance ministry and later backed by the general insurers. If a pool is formed, on the lines of the terrorism-pool in India, the losses would be distributed evenly. The pool would consist of regular premiums being made by the common citizens, with or without additional government funds infused in it.
A Swiss Re study had said that in 2011, insured losses from global natural catastrophes exceeded $110 billion, which made it the second-highest catastrophe loss year ever for the insurance industry.
According to a recent report from catastrophe modelling firm AIR Worldwide, there is nearly a seven per cent probability that the global insurance industry will experience this loss-level in any given year.
