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DISASTER INSURANCE AND INSU

Insurance products that are available in the Indian market in personal as well as

commercial insurance business segments inter alia! cover perils o" natural disasters

as well as man#made disasters!

India is the "ourth largest econom$ in the world toda$ with a %D& o" USD ' Trillion

measured on purchasing power parit$ (&&&) basis growing at the second highest

rate a"ter China! India is also the third most disaster prone countr$ o" the world a"ter

China and USA!

As per *orld +ank &olic$ &aper the availabilit$ o" insurance o,ers the best

mitigation approach against real and -scal conse.uences o" disasters! /owever the

insurance penetration (Insurance as a percentage o" %D&) in India is ver$ low! It is

onl$ 0!12 which is lower than man$ least developed countries!

Ironicall$ India was probabl$ the -rst among the developed countries to have an

insurance legislation!

Insurance products that are available in the Indian market in personal as well as

commercial insurance business segments inter alia! cover perils o" natural disasters

as well as man#made disasters! These traditional insurance products3 o,er

indemnit$ to polic$ holders! In the event o" the insured propert$ being lost or

damaged due to insured perils the polic$ holder (insured) gets indemni-ed "or the

loss! Traditional insurance is e,ective in case o" "re.uent non#correlated low#

conse.uence events such as motor accidents -res and routine 4ood c$clone

storm damage to residential and commercial propert$!

&ropert$ 5arine and 5otor (Traditional) insurance policies

At present the industr$ o,ers coverage against natural catastrophe perils under 6ire

&olic$ which also has provision to cover earth.uake and all Act o" %od perils!

Terrorism can be covered as an e7tension under the same polic$ b$ pa$ing

additional premium! Coverage like this can also be availed under other package

polices called /ome Insurance which is essentiall$ meant to cater to the needs o"

Individuals!

5arine policies cover marine hull and cargo whilst in transit b$ sea air or road!

These policies also cover loss or damage to the hull or the cargo b$ natural perils!

5otor Insurance &olicies cover damage caused to the vehicle b$ natural perils i" the

polic$ has been e7tended "or comprehensive coverage!

8oss o" 8i"e

Under general insurance loss o" li"e is covered onl$ under &ersonal Accident (&A)

policies which also covers ph$sical disabilit$ "or an agreed amount which is related


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to the annual income o" the proposer &ermanent disabilit$ resulting in loss o"

earning capacit$ o" an individual is also covered under this polic$ "or pa$ment o"

compensation which is pre#decided in the "orm o" percentage o" the sum insured! In

the event o" un"ortunate death the entire sum insured is paid to the nominee legal

heir o" the insured!

8oss o" li"e is covered b$ li"e insurance companies under various covers!

Disaster Relie" I And Risk Trans"er I Through Insurance

CD&olicies "or Rural population The &ublic 8iabilit$ insurance products o,ered b$

insurance companies cover the "ollowing !

The industr$ also o,ers coverage o" propert$ and toss o" li"e in a limited manner

through various rural policies! Such policies are also provided b$ %overnment "or

citi9ens under special schemes with subsidi9ed premium!

There are also weather policies which cover the losses that a "armer ma$ su,er dueto shortage o" rain"all or 4oods caused b$ e7cess rain"all as against a pre decided

trigger point! A brie" snapshot o" insurance products and disaster perils coverage

available is given in Anne7ure 1!

To illustrate how &olicies pertaining to various classes o" Insurance have contributed

in alleviating the loss or damage "ollowing a disaster we give below a table giving

details o" claims received in 5umbai 4oods :00;!

5umbai 6loods :00; # Initial estimate o" losses

1 Fire 14,782 2.449.46

2 Engineering 235 91.24

3 Miscellaneous 8,218 184.18

4 Motor 24.461 115.16

5 Marine 430 130.69

6 PA 16 0.45

l T?TA8 48,142 2,971.18

Sr ,cr E lc't sr R,

Subse.uentl$ the claims were settled "or total amount o" Rs! ::@ Crores! All the

above products indemni"$ the actual loss or damage to the propert$ or the person

who is insured under the polic$!

0 &ublic 8iabilit$ insurance

IndustrialBcommercial accidents causing death B inur$ to a third part$ is covered

under &ublic 8iabilit$ insurance!

@! As per &ublic 8iabilit$ Insurance Act @@


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:! *ider cover "or Third &art$ liabilit$ over and above the Act provisions

'! Comprehensive %eneral 8iabilit$

6or the purpose o" this concept paper on disaster relie" &ublic 8iabilit$ insurance as

per the Act would be relevant!

As per The &ublic 8iabilit$ Insurance Act @@ all establishments handling

ha9ardous substances have to necessaril$ obtain a mandator$ insurance cover

called &ublic 8iabilit$ Act &olic$ which has -7ed compensation being provided to

citi9ens who are a,ected b$ an$ calamit$ resulting "rom the handling o" /a9ardous

substances like e7plosionBgas leakBenvironmental damages resulting in pollution o"

water bodiesBsoil!

In addition to above there are other commercial establishments (not re.uired to

take mandator$ &ublic 8iabilit$ Act 8iabilit$ Insurance I like mallsBtheatresB

hospitalsBe7hibition sites that are also e7posed to liabilit$ in the "orm o" inur$Bloss

o" li"e to public who would be visiting their premises! The liabilit$ would arise in the

event o" a visitor su,ering an Inur$ or damage due to alleged negligence on the

part o" the ownerBoperators o" the mallBtheatreBhotel or e7hibition site!

+oth commercial establishments who are handling ha9ardous substances and nom

industrial establishments like theatresBmallsBhotels etc! can also opt "or policies

which o,er higher limits as per the risk e7posure o" the insured! Such limits depend

on various "actors like turnover o" the compan$!Bt$pe o" clientsBvisitors who would

be coming to the premises! 6or e7ample a large -ve star hotel will have high net

worth individuals checking in who would claim "or damages which can be ver$ high!

ECONOMIC LOSS VS. INSURED 0 LOSS ("INSURANCE GAP")

Natural catastrophic disaster events like tsunami c$clones 4oods and earth.uake

cause immense damage! with thousands o" casualties and millions rendered

homeless without shelter medical aid "ood and work It is diFcult to comprehend

the task "acing the countries a,ected in putting their communities back together! It

is the poorest o" our communities that are most a,ected and as such insurance is

not purchased and there"ore serves little purpose! *orldwide statistics show that on

average onl$ @G2 o" a catastrophic loss is insured! That is H2 o" the loss "alls

back to the government!

An independent stud$ b$ the Centre "or Economic and +usiness Research (CE+R I"or Uo$ds3 has highlighted how badl$ prepared man$ high growth countries are "or

natural disasters! The cost o" catastrophes has grown b$ USD H10 +illion since

@H0! In -ve o" the seventeen severel$ underinsured countries the average loss "or

maor catastrophes is at least H02!

Countr$


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Insurance %ap

Insutcd &roportion o" loss@:00#:0@@)

United ingdom GG!H 2 :'@ New Jealand G'!; 2 @': Canada ;;!' 2 @':'

Australia ! 2 H: United States :!1 2 @!H;H0 Spain '@! 2 G0' Turke$ @H!G

2 :'00 Kapan @G!G 2 :!0@G1G India @;!12 1H;G Indonesia H!12 ;1H; Colombia

'!: 2 @GG1 China @!2 :0H!00'

Disaster Relie" I And Risk Trans"er I Through Insurance I

Under Insurance "or Catastrophes

?ne o" the recent stud$ reports b$ 8lo$ds3 looked at ten most costl$ natural

catastrophe events b$ economic toss between @00 and :0@:! This stud$ has

attempted to stud$ under insurance in "ort$ two countries the cumulative premium

income o" whom constituted 02 o" %lobal nonli"e insurance premium in :0@@! ?"

the seventeen countries identi-ed as under insured eight are in Asia (Indiaincluded)! These Asian countries in the region are highl$ vulnerable to e7cessive

uninsured losses!

LIndia has an under insurance o" over Rs! @00000 Crores (USD @!1: +illion) in

:0@@! A natural catastrophe would cost (on average) an uninsured loss o" over Rs!

@0000 Crores (USD @!G +illion)

Insurance penetration and per capita %D& has a direct relationship! As a countr$3s

per capita %D& increases! it is e7pected that insurance penetration would also

increase! Using insurance penetration levels "rom low risk countries with low per

capita income as benchmark this report has estimated that India has an underinsurance o" over Rs! @00000 Crores I USD @!1: +illion) in :0@@!

This stud$ "urther estimates that "or India! a natural catastrophe would cost (on

average) an uninsured loss o" over Rs! @0000 Crores @USD @!G +illion)! This report

establishes that as countries become better insured! the proportion o" uninsured

losses decreases (based on benchmarked insurance coverage)!

Proportion of Insure !osses s. Uninsure !osses

M Innund pnpank# o" In!2 @:0@0@@@

■ UmM!!!M lawn :@)nM

OSpeci-call$ the correlation between the two demonstrates that a @ percentage

point increase in bench marked insurance coverage is e.uivalent to an @@

percentage point reduction in the estimated average uninsured loss! To put in

conte7t this represents a "all "rom uninsured loss o" roughl$ that o" Kapan at H'2 to

Spain at G2O!


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As per this stud$ H;2 o" losses are uninsured in India in terms o" insurance

penetration and Insurance gap!

Uninsured loss :00!:0@@ (2 o" total loss) and bench#marked insurance coverage

(average "or :00#:0@@)

ea

M mod Ia!

M ■!MMM■i MP lb! AI5 M @@0MMMMMMMMM

@@MMMMMMMMMMMMMMtwM

6ailure to .uickl$ and eFcientl$ deal with these issues a"ter a maor catastrophe can

literall$ cause substantial strain to an econom$! A good e7ample o" this is seen "rom

Turkish earth.uake in @! The Turkish %overnment was totall$ unprepared "or the

economic a"termath o" such an event and acted slowl$! As a result the Turkisheconom$ went into a severe recession and has not to this da$ "ull$ recovered!

0

Comparison o" ' maor Asian Natural Catastrophes

A comparison o" three maor Asian natural catastrophes between :00H and :0@@

has been made to understand the insured and uninsured loss as well as time

re.uired "or recover$ and complete reconstruction!

Comparison o" ' maor Asian natural catastrophes (-gures in USD +illion)

Total damage (USD +illion) @:; :@0 '0 Total damage as a percentage o" %D& :!11

'!;H H!GH Insured loss (USD +illion) 0! '; @: Insured loss as a percentage o" %D&

0!0@ 0!0G '!1 Insurance gap (USD +illion) @:!G @1; @H %ap as a percentage o"

%D& :!1G :!H ;!:@ Economic recover$ (months) @: @: @: Time "or total

reconstruction (months) 'G G03 'G

OThe insurance gap has a strong e,ect on the economic cost which ultimatel$ "alls

on the ta7 pa$ers! *here the insurance penetration is high (Kapan) the monthl$

cost to ta7 pa$er is less! Increased insurance penetration is likel$ to lead to better

insurance coverage and subse.uentl$ a reduction in the level o" damages and

recover$ cost which "all upon the government and there"ore upon the ta7 pa$erO!Q

o" o" morpnlvdc o" the even and thlM @@M@0!H0 CrlMaerturn al loss d n e8ternoted

5N the tome cairn "or itnol nvover$ woad be G0 months! Centre la "?nonnes and

AilMneM at#*EAR "?r lbws # %ibbet undr!ntarnante wpott # ?noter

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