The Hindu Business Line : Payouts during calamities: Fact & fiction

The reason for the disparity in the figures is that the entire sum insured is calculated as the loss. On closer examination of the policy and assessment by the surveyor, the claim payout might be a fraction of the sum insured.

A view of a flooded stretch in Mumbai during the recent rains. — Shashi Ashiwal

NATURAL disasters have been the theme of the year - spurring insurance as well as reinsurance companies into action. Hurricane Katrina might harden international reinsurance rates and domestic calamities such as the floods in Maharashtra and Gujarat and fire at the ONGC rig could further hike premia for domestic insurers.

The media has on its part, flashed figures of colossal losses. Very often, these numbers don't distinguish between the economic and insured loss and the disparity between the two is ignored.

In the case of insurance companies' losses, the actual-claim payouts differ from the estimations.

A recent example is the ONGC fire where the loss estimated was about Rs 1,800 crore. The claim was reportedly settled at a much lower figure.

More examples include the Gujarat cyclone (1998) and earthquake (2001).

The insurance companies' losses in the cyclone and the earthquake were estimated at Rs 1,350 crore and Rs 880 crore respectively.

However, the amount that was finally settled was Rs 500 crore and Rs 420 crore in each of the disasters.

The reason for the disparity in the figures is that the entire sum insured is calculated as the loss.

On closer examination of the policy and assessment by the surveyor, the claim payout might be a fraction of the sum insured.

Besides, if the policyholder has defaulted on the premium payment, this would further affect the claim payout.

So, given that the losses estimated in the Mumbai floods is about Rs 3,700 crore across all lines of business, the actual figure could perhaps be just a fraction.

The question that looms large for insurance companies is how they can assess losses in advance? Are they prepared for it?

Most developed countries rely on risk models, where data about the geographical area, soil type, buildings and vulnerability to natural calamities (acts of God) or man made ones is available to estimate the losses. This data aids in arriving at the sum insured.

While the public sector general insurance companies in the country are in the process of collecting this `exposure to risk' data, private insurance companies which now hold 20 per cent of the market share already hold a sizeable database.

Gujarat and Maharashtra together account for 40 per cent of the entire country's premium collection. Mumbai alone contributes 25 per cent of the premium.

So, data from these areas would be of significance while building a risk model.

The impact of Katrina on reinsurance rates will be felt in January, which is when the reinsurance premiums will come up for renewal worldwide.

In India, GIC, the national reinsurer, will then have to rise to the occasion and work out a risk-price model based on the empirical data collected in India over the 33 years.

Post the 9/11 attack on the World Trade Center, reinsurance rates skyrocketed.

Since the reinsurance market is a function of demand and supply, rates gradually softened with the infusion of fresh capital into the market.

In the aftermath of 9/11, even insurance companies in developed markets were not able to get terrorism covers.

In India, under the leadership of GIC, insurance companies were able to put together what is called a "terrorism cover pool".

Today, this pool can over an indemnity of Rs 500 crore in any location.

Forming a "natural perils pool" could protect insurance companies from natural disasters resulting in the hardening of premium rates.

However, the difference between a "terrorism cover pool" and a "natural perils pool" is that the latter would have to cover a greater volume of policies than the latter.

According to Mr R. Chandrasekaran, Assistant General Manager, GIC, this would require a great deal of underwriting discipline and co-operation from all the insurance companies. Besides, the Indian tax laws do not give concessions for catastrophic provisions.

Testing times lie ahead, especially when general insurance companies renew their reinsurance contracts in April.

GIC will renew its contracts in May - and the good news is that there could be a drop in the reinsurance rates by that time.

All in all, with a degree of co-operation and effort, Indian insurance companies won't have to run for cover as the winds blow the premiums northwards.

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