How you can insure against natural disasters

The World Bank has estimated the damage from Japan's earthquake and tsunami to be around $235 billion and says that it could take the country five years to rebuild itself. The degree of devastation in Japan has left other nations in shock. India too has had experiences of earthquake, tsunami and floods, but there is still limited awareness about the need for catastrophe insurance. For those of us who have been watching the television footage of the massive wreckage of homes, property, vehicles and assets wrought by Japan's twin calamities, one question that comes to mind is: How can I protect my assets from natural disasters?

The answer — ‘through insurance' — is not as straightforward as it seems. General insurers as a rule do not offer blanket policies that cover all risks. Though the risk of damage of a house and its contents following flood, earthquake, tsunami, fire as also terrorist activities are insurable risks, specific policies may choose to exclude it.

So, before buying a policy do check if it covers the specific risks you are looking to insure against. One general exclusion, however, is destruction (to life/property) caused by radioactive, toxic and nuclear explosives. Here, we take a comprehensive look at the common features you ought to look out for while buying insurance, to financially protect the future of your assets (or your dependants) from natural disasters.

Protecting property

A home insurance policy, offered by general insurers such as HDFC ERGO, Future Generali India, ICICI Lombard General Insurance, secures the structure and contents of a building (kutcha construction excluded) used for residential purposes. It covers risks that follow fire, earthquake, flood, storms and landslide (a cover for earthquake and flood automatically includes risk from a tsunami).

Terrorism cover is usually an ‘add-on feature' for a little extra premium. However, damages due to a war in the country or damage due to radioactive toxics are excluded from the ambit of such policies.

General insurance policies are normally issued for a year and have to be renewed at the end of every year. So, if the construction cost of the building rises, you need to get the sum insured revised, cautions Mr K.G. Krishnamoorthy Rao, MD & CEO, Future Generali India.

Premium rates are almost standardised in a home insurance policy (high risk zones from a seismic or flood point of view do not require significantly higher premium payments). The premium will, however, depend on the combination of risks one chooses to cover. For a fire and special peril policy, the average rate is Rs 70-100 per lakh currently. But remember, if you buy the flood cover in a rainy season, you may be charged some premium.

The bottom-line of an insurance policy is to cover unforeseen risks, so, you can't rush to insure after a flood warning has already been issued! What is the sum you are likely to receive if your house is damaged by a disaster? The sum insured for the structure of the house is based on the ‘reinstatement value', says Mr Karan Chopra, Head- Retail business, HDFC ERGO General Insurance. Reinstatement value is the reconstruction cost of the building — i.e. the construction cost of the building in that specific locality multiplied by the built-up area of the house. The contents of the house are insured based on their market value. Market value is the price of replacing each asset with a deduction for depreciation charge on the old product.

CLAIM PROCESS

In case of valuables, referring to mainly gold jewellery here, most insurers have a ceiling limit for sum insured. ICICI Lombard covers valuables to a total sum of Rs 1 lakh (or 25 per cent of the value of the items whichever is lower).

Moving to the process of buying the policy, it has become much simpler, with many insurers offering the policy online now. If you input the value of the sum to be insured and your personal details, the insurer usually accepts these details based on self-declaration. The valuation of the property or verification of the documents of the property is not done when such a policy is issued.

A surveyor from the insurance company generally does this at the time of a claim, if there is one. When claims follow a catastrophic event, where all documents are destroyed, the surveyor actually makes an assessment of total and settles the claim, without insisting on documents, says Mr Sanjay Datta, Head, Customer Service, Health & Motor, ICICI Lombard General Insurance.

A home insurance policy offers cover to secure the contents of a house from theft too. Many insurers provide add-on covers that include cover for the rent for new accommodation, removal of debris and also a personal accident cover (of course, at extra cost).

Protecting life

When a family loses its key earning member through death or disability, that could throw the entire family into crisis, especially when there is no external financial support. A term policy is a pure risk cover product that supports a family that has lost its key income-earning member by providing a lump sum amount. Death, be it following any reason (there is a waiting period of few years for claim on suicidal death) is covered under term policies. The premium for pure term covers is usually nominal as no maturity benefits are attached. With term policies now available online, term insurance policy premium rates have come down even further. For a sum assured of Rs 50 lakh, term policies (pure risk cover with no rider benefit) come at a premium of around Rs 6,000-7000 a year (term: 30 years) for a 30-year-old man. For a woman of the same age, a term policy for the sum assured of Rs 50 lakh will come at an annual premium of Rs 5000-6000 (term: 30 years).

A term policy, however, only offers benefits on death. It doesn't help in a crisis situation such as the accidental disability. One should thus supplement pure term cover with an accident cover. An accident cover can be taken as a standalone policy from a general insurer or even as a rider with the term policy from your life insurer.

Death or disability that follows an accident (natural disasters included) is covered under a personal accident policy. Some insurers also pay for hospitalisation (following accident) under this policy. If this accident cover is taken as a rider with a term policy, the insured's nominee will get sum assured under the term policy as also sum assured under the rider on accidental death of the policy holder. A 30-year-old man (non-smoker) buying an pure term plan online with AEGON Religare Life Insurance for 20 years with a sum assured of Rs 10 lakh will pay an annual premium of Rs 1963. For an accident rider of Rs 5 lakh, he will be paying an additional Rs 825 in annual premium.

Someone who wants to save on the premium outgo for a life policy, however, can take an accelerated rider for accident cover, says Mr Yateesh Srivastava, Chief Marketing Officer, AEGON Religare Life Insurance, where the total sum assured on the policy reduces.

Suppose a term policy has a sum assured of Rs 5 lakh and allows an accident rider for Rs 3 lakh. If one opts for an accelerated rider here, the total sum assured on the policy will only be Rs 5 lakh. For a claim on the rider at any time Rs 3 lakh will be paid, but from that point, only the remaining amount of Rs 2 lakh will be paid as death benefit.

There are bouquets of products from different insurers, both to cover life and personal accidents. Risks covered and benefits offered increase with the premium (there are policies that give twice the sum assured on an accident cover if the claim follows accident on mass transport). So, it pays to make an informed choice.

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