Small businesses in the country have been hit the hardest by the coronavirus (COVID-19) outbreak and the subsequent lockdown. Business interruption due to the lockdown has cost Rs 15.5 lakh crore loss to the retail sector alone. Along with other industries, the estimated loss surpasses Rs 30 lakh crore. However, what is even more disturbing is that the insurance cover is limited.
Business interruption insurance covers financial protection for disruption in business/production activity in a building or commercial establishment due to fire, floods, earthquake or other natural disasters.
But small and medium businesses either totally skipped taking this cover or had agreed to specific exclusions for pandemic-like situations. The result: No insurance claims were paid for lockdown-related business impact.
Taking a cue, in July 2020, the insurance regulator had constituted a nine-member working group to look into the possibility of setting up an Indian Pandemic Risk Pool.
This working group has now proposed that a Rs 75,000 crore pool should be set up to deal with the 40 million medium, small and micro enterprises. The group has also recommended that the premium collected could be invested in government securities or specifically designed bonds by the Indian government.
The premiums accumulated over the years and the investment surplus would help in gradually reducing the government contribution.
But the real question is whether there is adequate financial capacity in India to pay for the pool. In a general pool structure, the premiums collected from the customers gets collected and large claims are paid out of the pool. But to set up a large pool, insurers typically contribute between Rs 1,000-2,000 crore as an initial investment.
When it comes to the pandemic risk pool, if insurers contribute Rs 2,000 crore, it means the rest Rs 73,000 crore will have to come from the government. It has to be seen if the central government agrees to set aside this huge sum for this insurance pool.
State governments will also have to be involved in the way of financial contribution to the pool. If a 60:40 contribution between centre and states is agreed upon similar to other insurance schemes, will state governments have the financial strength to pay?
Take West Bengal and Odisha for instance. These two states were ravaged by the Amphan cyclone in May and the losses from this one event alone have been pegged at Rs 1.02 lakh crore. The centre announced Rs 1,500 crore as a rehabilitation package for this natural catastrophe. The West Bengal government alone is spending close to Rs 6,300 crore for relief work.
At this juncture, will these state governments be in a position to further contribute to the pandemic pool? And on what basis will the state contributions be decided?
Scientists have predicted that the world must prepare for future pandemics even as the impact of COVID-19 is far from over. With this, for the most vulnerable small enterprises, it is essential to have insurance to ensure that there are adequate funds available for maintaining capacity and to pay worker salaries.
Solely depending on insurance companies’ capacities will not work for large-scale outbreaks like COVID-19. So, it is high time for the central and state governments to start working on funding mechanisms for future virus outbreaks. Pandemic pools could help save costs and would immediately aid the lowest strata of the economy to survive during possible lockdown-like scenarios of the future.
The much-touted natural catastrophe insurance pool
never took off due to the lack of consensus on who would fund this model. The pandemic risk pool must not be allowed to face a similar fate.