The working group has said that insurers should offer standard products to avoid confusion.
Insurance of home structure must cover accidental death due to gas cylinder explosion for a reasonable amount, the Insurance Regulatory and Development Authority of India (IRDAI) has said in a working group report on fire insurance for dwellings, offices and shops.
Almost 4,000 lives are lost every year in India due to gas cylinder or stove blasts. With home insurance covering such incidents, financial payouts will also be made accordingly.
The regulator said there should be only one product for fire and allied perils for dwellings of any value. All existing products with varying terms and coverage should cease to exist.
The regulator has proposed three categories of home insurance. One would be home insurance for home buildings and contents.
The second would be micro commercial insurance for commercial enterprises whose value at risk at one location per policyholder is up to Rs five crore. This will include insurance for the building, plant and machinery, trade equipment, stock in trade and other trade-related contents.
The third category would be small commercial insurance for commercial enterprises whose value at risk at one location per policyholder exceed Rs five crore but are up to Rs 50 crore. This will include insurance for building, plant and machinery, trade equipment as well as the stock.
The report said the existence of multiple products in the fire category with differing words creates confusion amongst this segment of customers whose awareness about insurance is anyway low. It said that insurers must not be allowed to vary the terms, conditions, coverage and add-ons for these products.
Insurance for catastrophic incidents
The working group said recent catastrophic events like J&K Floods, HudHud Cyclone, Chennai Floods, and Vardha Cyclone in India have revealed that the economic losses are far higher than the insured losses. This highlighted the poor penetration of property insurance in the country.
In the product for the dwellings, commercial enterprises and the MSME sector, the report suggested covering all catastrophic perils in the base policy itself. It also proposed that there be no provision made in the policy for a discount in the premium offered to the insured for opting out of this cover. It suggested that the government could fund these losses by the use of instruments like catastrophe bonds.
Catastrophe bonds or Cat bonds are a new method of transferring insurance risk to the capital markets. The proceeds from the sale of the bond are invested in near risk-free instruments to generate normal market returns. This gets combined with insurance company’s premium and allows the bond to pay a higher spread over money market returns.
These returns are paid through periodical coupons to investors. If no insurance event occurs the investor receives the higher coupon for the term of the bond, usually three years, and receives the principal back at maturity. If one of the insured events occurs, all or part of the principal is transferred to the insurance company, the investor’s coupon payments cease or are reduced, and at maturity, there is either zero, or a reduced amount of principal repaid.Keeping in view the high volatility of natural catastrophe (NAT CAT) losses, their increasing frequency and the likely high premium rates, the working group could not reach a conclusion on recommending a standalone NAT CAT insurance product. However, it said that the best solution to NAT CAT perils appears to be government funding reinsured by Cat bonds.Subscribe to Moneycontrol Pro and gain access to curated markets data, exclusive trading recommendations, independent equity analysis, actionable investment ideas, nuanced takes on macro, corporate and policy actions, practical insights from market gurus and much more.