Government may reassess natural catastrophe insurance pool, focus on small dwellings

The government is likely to reassess the natural catastrophe insurance pool due to mounting economic losses from a series of such events in India over the past three years.

Sources said the government may look to revisit a pool-like structure for offering natural catastrophe insurance covers that would protect property and dwellings from floods, earthquakes, cyclones, landslides, among others.

A natural catastrophe (nat-cat) pool to pay-out insurance claims for incidents like floods, earthquakes and landslides has been in the making for almost five years now. However, due to a lack of consensus on the structure of the pool, it has not yet been set up. “After Cyclone Amphan, a consensus is emerging that there should be a cover for dwellings and physical belongings during a natural catastrophe. Traditional insurance products may not fit to cover events of such a large scale,” said an official.

The insurance regulator has also been working on having a few pilot projects in vulnerable areas to offer property insurance. For those below the poverty line, some premium concessions could be given. In the last five years, losses due to catastrophes have led to insured losses of almost Rs 27,000 crore. This includes losses due to the Uttarakhand floods and Kerala floods, Assam floods in 2018 and 2019, cyclones Aila, Hudhud and Phailin, as well as the Chennai floods in 2015.

Having a pool structure to pay insurance claims ensures there are adequate resources available to settle large claims. A similar pool is available for nuclear risks and terrorism. Here the premium collected is added to the pool and claims are paid out of it. When it comes to the natural catastrophe pool, it is likely that both the centre and state governments could contribute an initial amount. Large insurers in the public and private sector could be made part of the pool.

The share of uninsured catastrophe losses varies by region. A Swiss Re report said it was typically higher in developing countries where infrastructure construction and implementation of catastrophe risk mitigation measures did not keep pace with economic growth. However, there are areas of underinsurance in advanced countries too, even in those with known medium to high exposure to certain hazards.

Individual products do offer protection to life and property. But, there is no special cover that offers comprehensive protection against natural catastrophes caused by climate change. A large event like the Kerala floods has the ability to escalate and wipe off the solvency of insurance companies.

The most recent catastrophic event, cyclone Amphan (pronounced UM-PUN) that hit West Bengal and parts of Odisha on May 20 could lead to insured losses of Rs 400 crore, as per initial estimates. A majority of the claims pertain to crop loss due to the destruction of agricultural land, and motor insurance losses.