MC EXCLUSIVE Govt mulls natural disaster risk insurance pool, home and finance officials met February 27

Natural catastrophe insurance pools are specialised risk-sharing mechanisms designed to manage losses arising from extreme natural events.

• Government discusses creating a Nat-Cat risk insurance pool
• Home and Finance Secretaries to meet on February 27
• India lacks a unified national natural disaster insurance pool

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The government is moving ahead with plans for a natural catastrophe (Nat-Cat) risk insurance pool to manage losses arising from extreme weather or other such events, with the home secretary likely to meet his finance ministry counterpart on February 27, sources said.

While officials declined to provide contours of the proposal, the move signals a renewed focus on disaster-risk financing. It is also an effort to prepare the insurance sector to absorb large-scale losses arising from extreme events such as floods, cyclones and earthquakes.

“The idea of a dedicated mechanism to manage natural catastrophe risks has been taken up for discussion at appropriate levels. A meeting between the home secretary and the finance secretary is scheduled later this month,” a government source told Moneycontrol.

Institutional coordination

While home ministry is responsible for disaster management, the insurance sector policy and financial stability considerations are in the purview of the finance ministry.

“The proposal, if it progresses, would naturally require coordination between disaster management authorities, financial regulators and the insurance industry,” the official cited above said.

Why the proposal matters

India remains highly exposed to climate-related and geological risks, with natural disaster imposing significant economic and fiscal costs.

Despite rising losses from extreme weather incidents, insurance penetration for catastrophe-linked risks remains limited, leaving a substantial portion of damages uninsured.

Catastrophe pools are commonly used internationally to distribute low-frequency but high-severity risks across insurers and reinsurers, often supported by government backstops or guarantees.

“The absence of a formalised catastrophe risk-pooling framework means that losses are largely absorbed either by affected households and businesses or through post-disaster government relief measures. A pool structure can help stabilise underwriting and improve claims-paying capacity after major events,” the source said.

What is being discussed?

Sources said the February 27 meeting is expected to focus on broad institutional and financial considerations.

“Discussion will likely assess whether risk-sharing mechanisms can be strengthened without creating undue fiscal pressures. The structure, funding model and regulatory treatment are all issues that would require careful evaluation,” the source cited above said.

Globally, catastrophe pools adopt varied structures – ranging from government-backed schemes to hybrid public-private arrangements – with participation by insurers often mandated or incentivised through regulation.

Funding and design

Funding architecture is likely to be the central element of the deliberations. International models frequently rely on policyholder levies or premium surcharges, complemented by reinsurance and, in some cases, sovereign guarantees for extreme-loss scenarios.

“Any proposal of this nature would require balancing affordability for policyholders with solvency protection for insurers. Clarity on who bears tail-risk exposure is critical for market acceptance,” the source said.

Sources did not say if any specific funding route, including policy levies or budgetary support, has been considered.

What is a Nat-Cat insurance pool?

Natural catastrophe insurance pools are specialised risk-sharing mechanisms designed to manage losses arising from extreme natural events.

Such pools typically aggregate risks across insurers, enabling more predictable pricing and ensuring claims-paying capacity following large disasters. Countries including Turkey, Japan and France operate variants of catastrophe risk-pooling or state-backed reinsurance frameworks.

India does not have a unified nationwide Nat-Cat insurance pool.