Natural catastrophe insurance pool concept stuck due to lack of consensus on funding, size

Rescue workers search for the bodies of missing persons after a landslide, triggered by heavy rains and floods, at Nenmara in Palakkad, Kerala. (Image: PTI)

A natural catastrophe (nat-cat) pool to payout insurance claims for incidents like floods, earthquakes and landslides has been in the making for almost five years now.

However, insurance companies have been unable to arrive at consensus on who (centre, states or insurers) will fund the pool and what will be the size of the pool.

Sources told Moneycontrol that insurers are still toying with the idea as they haven't been able to zero-in on what the size of the cover will be, the limits for each individual/corporate, and who will contribute how much.

This pool would be used during natural disasters like the Kerala floods to pay out insurance claims. It was planned to set up the initial pool by getting the government to contribute a part of it and getting the rest from insurers.

However, the quantum of each party's share could not be agreed upon. It was initially decided that the pool will have a structure similar to the terrorism pool that is currently operational.

The insurance of terrorism risks in the Indian market is undertaken through a pool system. All non-life insurance companies operating in India are members of the pool.

The Indian Market Terrorism Risk Insurance Pool provides capacity up to the specified limit of liability to the insurers.

The 2013 proposal

The idea to have a nat-cat pool was mooted as early as 2013 by the finance ministry in the wake of the Uttarakhand floods and landslides, which led to the loss of almost 4,500 lives.

Following this, non-life insurance companies had presented a concept paper on catastrophe insurance to the National Disaster Management Authority (NDMA).

The paper highlighted the need for a pool mechanism to deal with losses from catastrophic events. Due to an absence of such a pool, both insurers and reinsurers have to bear a big hit to their profitability.

In the last five years, losses due to catastrophes have led to insured losses of almost Rs 25,000 crore. This includes losses due to the Uttarakhand floods, cyclones Hudhud and Phailin, the Chennai floods as well as the recent Kerala floods (initial estimates of Rs 1,000 crore insured loss).

"As an industry, there is an urgent need to have a pool in place to have a better claims support system for natural disasters," said a senior official at a private general insurer.

Losses from natural disasters

According to a report by global reinsurance major Swiss Re, total insured losses from natural catastrophes and large man-made disasters were $144 billion in 2017.

An active hurricane season in the North Atlantic, and a series of wildfires, thunderstorms and severe precipitation across different regions pushed global catastrophe claims to their highest-ever level for a single year.

Total economic losses stood at $337 billion, making an all-peril global catastrophe protection gap of $193 billion in 2017. Globally, more than 11,000 people lost their lives or went missing in disasters, while millions were left homeless.

Longer wait for the pool

Unless insurance companies agree on the premium rates and the standardised products for nat-cat events, the pool will not be set up.

It is estimated that the size of the pool will need to be around Rs 5,000 crore at the initial stage, considering the number of incidents reported across the country.

Once the pool is operational, covers can be taken against nat-cat incidents at a pre-decided premium, depending on the location and the risks specific to that geography.