Opinion

Time to step up cover for natural calamities

Manas R Das | Updated on November 11, 2021

Climate cover Need of the hour   -  REUTERS

Increasing people’s awareness and prodding insurers to market specific products for rural areas will help

One of the major findings of the recently released All-India Debt and Investment Survey (NSS 77th Round) by the National Statistical Office is the pronounced inequality in the distribution of assets, both in rural and urban areas, as at June-end 2018. In rural areas, the top 10 per cent of the households owned over 50 per cent of assets, whereas the bottom 50 per cent owned just 10 per cent.

In urban areas, the inequality was more visible than that in rural areas with the top 10 per cent owning 56 per cent of assets and bottom 50 per cent owning merely 6 per cent. The Gini coefficient at 0.678 for urban areas exceeded that for rural areas at 0.615.

Frequent natural catastrophes constitute one of the main reasons for exacerbation of inequality in asset distribution in India. This is evident from the median Gini value, which, for the coastal States, was higher than that for non-coastal States, implying higher inequality in assets distribution in the former (which is relatively more susceptible to rains, floods and cyclones) than the latter, and this was true for rural as well as urban areas.

In short, natural calamities, sans adequate insurance protection, hit the poor harder in terms of loss of assets and income than the rich.

India is vulnerable to almost all types of natural catastrophes: floods, tropical cyclones, earthquakes, tsunamis, droughts, landslides and hail. The government, private agencies (including NGOs) and global agencies help mitigate the after-effects of natural calamities. However, during such crises, no resource can be said as adequate. Therefore, households also have to do their bit, and one of the productive means is to protect their lives and assets from damages via insurance cover.

Mature economies are quite advanced in this regard. As a World Bank paper on climate insurance (2017) observes, “Insurance solutions can help bolster early action in the face of a disaster, and speed up recovery to restore livelihoods and rebuild critical infrastructure so that people, communities and economies can rebound.”

The World Bank, the Global Facility for Disaster Reduction and Recovery (GFDRR), along with partners, are developing insurance solutions and providing finance to help vulnerable countries proactively manage disaster risks through a portfolio of financial instruments. The World Bank Group’s Global Index Insurance Facility provides catastrophic risk transfer solutions and index-based insurance to small farmers, micro-entrepreneurs and microfinance institutions in developing countries. The International Finance Corporation is also active in this space. Accelerating this global effort, Germany, the UK, the World Bank and GFDRR, over 30 NGOs and private sector partners have launched a new Global Partnership called InsuResilience aimed at upscaling climate risk finance and insurance solutions in developing countries.

In India, most of the insurers offer cover for natural calamities under different policies which are meant for specific objects of insurance. By and large, the standard Policy for Fire and Natural Perils issued under Fire Insurance cover natural calamities and specifies their nature. There are policies derived from these basic wordings such as Industrial All Risk Cover. In many other policies, natural calamities are mentioned as specific perils covered.

Cannot be ignored

Against India’s disaster history, its geophysical position and the vigorously changing climatic conditions across the globe, the country cannot afford to take natural disasters lightly. Sustainable development must consider investing in disaster risk reductions, ex ante as well as ex post, in a cost-effective manner.

Low insurance penetration in India must be addressed primarily by motivating people not to become fatalistic and increasing their insurance awareness and literacy. Insurers must be prodded by IRDAI to market specific disaster insurance products for rural areas, which are always the worst-hit, and settle the claims lodged swiftly and appropriately. Increasing per capita income would incentivise people to consider risk-transfer mechanism as a major solution. With modern telecom, computation and technological facilities, adequately designed insurance products providing cover for the core economic property (both individual use and public utility) can help the government develop a resilient response mechanism. This in turn can accelerate the Environmental, Social and Governance (ESG) issues playing a crucial role in disaster financing mechanism.

All these would necessitate concerted efforts by all stakeholders including, principally, IRDAI and insurers. IRDAI and insurers should formulate a framework with weather module-based and parametric insurance solutions to bring adequate financial relief to end-users. Finally, the government may consider instituting a guarantee fund for insurers incurring ‘catastrophic’ losses due to payment of claims on account of natural disasters.

The writer is former senior economist, SBI. Views are personal

Published on November 11, 2021

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