Teadestruction in Uttarakhand Joshimath It is one of a long list of environmental disasters to strike India, often aggravated by human negligence. Some economic losses could have been avoided if we had followed the warnings of environmental risk assessments and better construction standards. However, losses are inevitable when disaster strikes. Given India’s vulnerability to climate change, how to allocate these losses should be a major public policy concern. To deal with disasters, our toolkit needs to be strengthened through disaster insurance.
Why disaster insurance?
India is almost vulnerable to natural disasters 75 Percentage of districts classified as extreme event hotspots. It is not possible to provide financial assistance after a disaster through financial means alone. Financial transfers to households may not be sufficient to repair and rebuild assets and livelihoods.
It is useful to calculate the ‘contingent liability’ on the government from disasters. That is, assuming that the current trend of earthquakes, cyclones and floods continues, what is the expected financial outflow of governments? Can a portion of this liability be shifted to private insurance markets? The core business of insurance is risk management. Consider an insurance company that has sold earthquake insurance in all parts of India. When an earthquake occurs at one place, he has to pay only at that place. Therefore, it is diverse.
However, the insurance company has to pay all policyholders In earthquake affected area. in that sense, it Even then Not able to diversify risk the way it is able to do in life insurance or auto insurance products. Insurance company charges premium from families on the basis of annual expected loss-that is, the expected payment given the likelihood of the event and the severity of the damage it may cause – and the administrative cost of providing cover. The company, in turn, buys insurance from international reinsurance companies. This is important because a natural disaster with high losses has the potential to bankrupt a firm.
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Catastrophe Insurance Market in India
There is no specific earthquake (or natural calamity) policy sold in India. it’s usually Part A standard fire insurance policy that covers damage to property caused by events such as flood, cyclone, fire, etc. Earthquake protection can be purchased as an add-on. Families are often not aware of these products or have an underestimation of the extent of their risk. It could also be that trust in insurance companies is low, and one is not really sure what coverage they are signing up for.
Insurance companies, in turn, will not want to force the sale of these policies because they risk losing significant capital if a catastrophic event occurs and claims have to be paid. Good pricing requires high-quality data that allows estimating the likelihood of an adverse event as well as potential losses. Such datasets are likely not to be available for India, making pricing difficult for the domestic and international reinsurance market. Uncertainty causes insurers to set aside additional reserves for losses, which leads to an increase in premiums.
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These problems are not unique to India. In 1995, the US state of California faced a similar issue, 93 Percent of the local homeowner’s insurance market had either restricted or stopped writing homeowner policies altogether. The California legislature then created a no-frills policy that a private insurer could sell. In 1996, it established the California Earthquake Authority (CEA), a non-profit, publicly managed and privately funded entity that offers earthquake insurance policies through certain insurance providers. Similarly, in 2000, the Turkish government launched the Turkish Catastrophe Insurance Pool (TCIP), which provides earthquake insurance up to a specific limit. TCIP is succeeded As a private insurance company under the guidance of the Turkish Treasury.
Detailed grade A number of public-private partnerships, which provide some element of disaster insurance, have emerged around the world. In some countries, the government has taken on the role of ‘direct insurer’ by setting up funds such as the Earthquake Commission in New Zealand. In other markets, governments act as ‘reinsurers’ – such as the Australian Reinsurance Pool Corporation in Australia and the National Disaster Insurance Fund in Thailand. The type of insurance offered also varies, ranging from residential property damage to commercial property damage and business interruption. There are also various models to ensure that the funding and governance of these institutions does not place new burdens on government budgets either through poor pricing or mismanagement of funds.
Developments in India include a Memorandum of Understanding (MoU) between the Nagaland State Disaster Management Authority, Tata AIG General Insurance Company Limited and Swiss Re (as a reinsurance partner). aims to provide coverage For extreme rainfall events that may cause severe flooding in the northeastern state. It seems that even the National Disaster Management Authority (NDMA) is considering an index-type insurance Solution For livelihood security of low income families in the event of a natural calamity. The outcome of these important initiatives may well shape the future of disaster insurance in India.
State governments should consider the possibility of setting up public-private partnerships and harnessing the power of financial markets. There are important decisions to be taken on product design, pricing and investment management. As each state evaluates a model best suited to its need, it should crowdsource the private insurance industry and ensure financial stability.
Renuka Sane is Director of Research at TrustBridge, which works on improving the rule of law for better economic outcomes for India. Thoughts are personal.
(Edited by Zoya Bhatti)