A public-private solution in the form of a National Disaster Pool, for hedging natural disaster risks, in close coordination with the insurance sector might offer many benefits over government-induced crisis loans and grants, according to Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

“If we consider 2020 floods in India, the total economic loss was of $7.5 billion (₹52,500 crore) but insurance available was only to the magnitude of 11%. If the government had insured it, then the premium for the sum assurance of ₹60,000 crore would have been only in the range of ₹13,000 to ₹15,000 crore,” Ghosh said in the latest edition of Ecowrap.

India recorded 756 instances of natural disasters (landslide, storm, earthquake, flood, drought, etc.) since 1900 with 402 events occurring during 1900-2000 and 354 during 2001-2021, indicating the preponderance of tail events off late. Since 2001, a total of 100 crore people have been impacted and nearly 83,000 people have lost lives due to these disasters. If the losses are adjusted with current prices, the losses comes out to a staggering ₹13 lakh crore i.e. 6% of India’s GDP. Also, there is huge gap in reporting of losses (loss data of only 193 events are available for India) and there are problems in existing estimation methodologies too.

Protection gap

Recently, the intensity and frequency of natural calamities, especially cyclones, have increased manifold in India. “In India, only around 8% of the total losses are covered, so, there is around 92% protection gap during the period 1991 to 2021. So, early intervention is needed to close the protection gap, which is in all lines (life & non-life) of insurance,” the report said.

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Going by the 92% protection gap in India, an average Indian is only insured of roughly 8% of what may be required to protect a family from a financial shock following the death of the breadwinner. This means having savings and insurance of just ₹8 for every ₹100 needed for protection. Lack of awareness of what is an adequate life insurance cover for an individual increases the mortality protection gap.

“The insurance sector and governments need to actively engage and discuss how best to address the potential contingent liabilities from pandemic risk. This would also imply relooking at credit underwriting standards by incorporating outlier observations often ignored by modelling data. Meanwhile, we notice with elation that the level of insurance has indeed jumped post-pandemic indicating that the understanding of obtaining insurance cover is now increasing across the typical Indian households and we believe this percolates at the government level too,” Ghosh added.

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