India is one of the world’s most vulnerable countries when it comes to climate change, and every year we incur losses of about $9-10 billion due to natural disasters.

Today, the Government is increasingly focusing on developing the infrastructure of cities. However, climate change and its associated risks poses a big threat to ensuring their safety and sustainability.

Every natural disaster comes with a huge financial burden. In order to make cities resilient, it is essential to improve their preparedness not just to make it safer for citizens but also to rebuild damaged infrastructure. Climate risk insurance is a good tool in this regard as it helps ease the burden on government finances for the repair and rehabilitation of cities after a disaster.

Risk and stress As part of the 14th Finance Commission grants, India pledged to invest around $9 billion for disaster management over 5 years (2015-2020), which is a fraction of the total requirement.

The propensity to insure infrastructure in India is far from satisfactory. The penetration of non-life insurance in the country stands at a meagre 0.7 per cent, leaving a large asset base uninsured and vulnerable. This leads to heavy reliance on government funds for damage repair, relief and restoration activities.

Governments worldwide are now looking at insurance as an effective risk-transfer mechanism to prevent sudden stress on government budgets in times of natural calamities.

Mexico, for example, has insured its public infrastructure against climatic disasters, whereas Taiwan, the Philippines and Sri Lanka have gone for parametric insurance covering their entire population.

The Government could play an active role in introducing this concept by making a few provisions in the existing policies. For example, inclusion of climate risk insurance premiums as admissible cost under programmes such as the Smart City Mission, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), etc could enable cities to insure public infrastructure being created in these cities.

This will ensure that the cities of the future are well equipped to face the natural disasters and rebuild swiftly. Budgets allocated for disaster relief funds could then be directed towards financing the premium payments for such insurance policies.

Mandatory provisions In regions which are affected by repeated climatic disasters, it would be useful to mandatorily insure critical public infrastructure like school buildings, hospitals and roads, etc.

Also, there needs to be a push to insure private assets like houses in such areas. Estimates show that providing home insurance cover to citizens could be a more affordable proposition for governments than providing compensation for post-disaster damages. Hence, the overall benefit to the citizens would eventually outweigh the incremental cost.

Economic Survey 2016-17 also recommends climate insurance products in India to cope with climate-related losses.

If the Government gives this a push, insurance players would be willing to step in with suitable products which could be further customised to suit specific requirements.

Given the impending risk that India faces today due to climate change, it is necessary that there is enough awareness amongst the policymakers. The time is right to insure the future of our cities.

Banerjee is a partner, Public Finance, Economics & Urban, PwC India; Chauhan is the executive director of GRID, PwC India; Ray is associate director of GRID, PwC India

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