Catastrophic risk and insurance | Cairn.info (2024)

1Catastrophic risk is one where a large number of people are exposed to the risk of a large loss by reason of the occurrence of a peril. It could be a natural calamity in the form of earthquakes, floods, draughts or even terrorism attack resulting in loss of life, destruction of infrastructure on a large scale. The September 11 attacks (often referred to as 9/11) are the most dreaded example of catastrophic terrorism attack. 9/11 was a series of coordinated suicide planned by ‘Al Queda’ upon the United States on September 11, 2001 where in excluding the 19 hijackers, 2,974 people died in the attacks. World Trade Center collapsed. The attacks left a significant economic impact on the United States and world markets. Catastrophes have occurred many times in history at global level also which affected many economies. Some of the most devastating global catastrophic risks resulting in loss of more than 10 million lives include the Taiping Rebellion (1851-1864), and the famine of the Great Leap Forward in China, the Black Death in Europe, the Spanish flu pandemic, the two World Wars, the Nazi genocides, the famines in British India, Stalinist totalitarianism, and the decimation of the native American population through smallpox and other diseases.

2Catatrosphes can have an adverse impact not only on the public finances of an economy but also can impinge on the very subsistence of poor and vulnerable communities. With the passing times, the incidence and severity of catastrophes is increasing. Swiss Re’s sigma study on catastrophes indicated that more than 2, 38,000 people lost their lives due to the natural catastrophes and man-made disasters in 2008 - the fourth largest number of deaths since 1970. Catastrophes in 2008 cost the society $ 225 billion. It includes both insured and uninsured losses to buildings, infrastructure and vehicles. Out of it, $ 50 billion was covered by property insurance, making 2008 the second costliest year ever in terms of insured losses The Sichuan earthquake was the costliest at $ 85 billion. Major catastrophes can put the whole progress of economy at halt. Sock markets plunge, GDP growth comes down, the financial strength of the economy weakens and a lot more. Therefore, no economy should ever dare to ignore making sufficient provisions to combat the financial losses of catastrophe.

3How countries are affected due to catastrophes?

4Catastrophes can have serious implications on poor households as they do not have sufficient resources to protect themselves from disasters. In the event of a disaster, poor communities often resort to self-insurance and informal means of risk management. If the intensity of the loss is not too severe and probability is high, self financing and informal means of risk management are effective. However, in the case of low probability, high intensity a loss, self financing and informal means of risk financing are ineffective. In the case of severe floods or droughts where the risks are systemic, the ex-post informal means of risk management include selling of assets. As the risks are correlated, therefore, large numbers of households resort to selling their assets at the same time which brings down the value of assets. The same holds true for wages. Poor farm households resort to off-farm means of coping with their losses. Since, the risk is spread over a substantial geography, the excess supply of labour and weakened financial capacity of the businesses depress the wages received. Therefore, systemic risks results in large scale loss in wage, income and work. It leads to growth in indebtedness and vulnerable communities are caught in the poverty trap.

5Resource allocation dor disaster management

6Catastrophe Risk management is an integral Part of Country Risk Management. World Bank Group plays an active role in assisting its client countries with building effective catastrophe risk management systems as natural disasters have a disproportionately adverse impact on the poor.

7Risk pooling and risk transfer

8It is high time that the scope of disaster risk management in India needs to be extended. Risk Pooling and Risk Transfer can prove to be very effective and complementary to disaster relief, rehabilitation and reconstruction. Risk layering can be used to identify the varied intensity of catastrophe risk and the role of each stakeholder in catastrophe risk management.

9Appropriate risk financing for different types of risks is shown in Exhibit 1.1.

10For the first category of the risk, the community can resort to savings and credit. The second layer could be covered by markets - insurance companies. If the impact of the disaster is severe and is beyond the scope of Insurance companies there is a need to look for options outside the domestic country through World Bank assistance and Reinsurance Contracts. The reinsurance could be provided by Reinsurers or Multi-lateral agencies. Munich Re is the world’s largest reinsurance company with over 5,000 customers in 160 countries and has its headquarters in Munich, Germany. It was one of the major insurers of the World Trade Centre in New York City that was destroyed on 11 September, 2001.

11Insurance as an effective means of risk financing

12Risk transfer mechanisms could increase efficiency in targeting relief and rehabilitation for a particular region if a proper mapping exercise of the disaster prone area is in place and the vulnerable population is identified. Insurance is extremely beneficial as it provides timely financial assistance following extreme event shocks; as a result long-term consequences of disasters are reduced.

13Insurance also diminishes the reliance on ex post resources and secure the needed resources in advance. It pushes the burden of loss from state/ community to insurer. It has multiple approaches as it works on to identify/reduce/transfer risks. Resulting risk reduction is a tool for sustainable development. It can monitor the quality/extent of mitigation measures. Insurance can incentives risk reduction approaches. These are generally inbuilt with incentives for effective risk adaptation and reconstruction. For instance, if an insurance system is in place in a region where an earthquake has occurred, the payout needs to be proportional to the magnitude of the losses. So, the insurers have an incentive to spend considerable time and money in building earthquake-resistant structures. But if should always be remembered that insurance does not reduce immediate disaster impacts, but provides indemnification against the losses by pooling risks against a premium payout.

14Role of insurance

15Insurance significantly empowers people and economy. Insured catastrophes occur when a single event (peril) can affect a large percentage of the loss exposed units in the insurance pool. In other words, losses are interdependent. Catastrophic risks, both natural and man-made, are fundamentally different from most other insurance risks in two critical ways:

16Frequency of Occurrence: Catastrophic events occur relatively infrequently compared to most other insurance risks. This makes catastrophic risks difficult to manage and price as there is not sufficient empirical information. They are not accurately predictable.

17Intensity of the loss: The severity of loss resulting from catastrophic events differs from more traditional insurance risks in two important ways. First, the severity of loss is not as predictable; similar events can produce altogether different losses. Secondly, and more importantly, catastrophic risks can produce losses of sufficient magnitude as to render insurers insolvent. Insurer may suffer heavy losses if they have provided coverage in those areas having catastrophic loss exposure. Similarly, they might not have taken cognizance of the scope for such a catastrophe while calculating premiums.

18Insurance based solutions

19Insurance based solutions for managing catastrophic risks depends on the degree to which risks are transferred to the parties that ultimately bear the risk.

20National Catastrophic Insurance Pools A country can choose to pool their disaster risk when the risk is large enough and the correlation of risks between the participating clients is relatively low.

21Commercial Micro Insurance It is distinguished from other types of insurance by its provision of affordable cover to low-income clients.

22Reinsurance Reinsurers can serve to diversify the risks that individual insurance companies cannot offset internally and finally transferring catastrophic risks to capital markets through the use of catastrophic bonds is another mechanism but remains an under developed option in developing countries like India.

23Commerial Insurance Individual Contracts It is good as it provides individual coverage against catastrophes. But it comes with the high costs of premium payouts.

24National catastrophe insurance pools

25National Catastrophe insurance pools are highly beneficial as it increases penetration for natural disasters from the current 1-5% to 30-50% over time. It builds up surplus (equity capital) inside the pools and over time reduces their dependency on international reinsurers for reinsurance capacity. It reduces government fiscal liability to natural disasters by transferring risk offshore. It also brings down the chances of volatility of domestic insurance rates for property coverage.

26Additionally, it is more feasible and viable in the following circ*mstances:

27It is good option when insurance provides low catastrophe penetration. Risk bearing capacity of Local Reinsurance and insurance companies is low making the government a rein surer of last resort.

28Low frequency/high severity and systemic risks could endanger the financial being of local reinsurers or the state as actual losses can be devastating in terms of adverse effect on% GDP and% Annual Government Budget and future economic growth.

29Immediate Post event liquidity is required. It also leads to developing risk awareness and encouraging better mitigation.

30Catastrophe micro insurance

31Ideally the Government should be holding the risk as an efficient relief targeting mechanism, but it may have serious implications because of the limited capacity of the Government to absorb risks. Catastrophe micro insurance acts as a complimentary contribution to the Government finances for low probability, high magnitude disasters. It is good on the following grounds:

32It is an effective risk transfer measure in coping with catastrophic risk and also eases budgetary pressures.

33It is a significant tool to cope with low probability and high magnitude looses. It is a viable means through which small regular payments by poor households can prevent an unpredictable large loss of income and assets of poor households.

34The provision of insurance to cope with natural disasters can also change the way vulnerable communities allocate resources, manage risks and will lead to the growth in investments of higher-risk, higher-return activities.

35Micro insurance can break the ‘cycle of poverty’ by providing low-income households with access to post-catastrophe liquidity, thus securing their livelihoods and providing for reconstruction.

36Reinsurance

37It is the method of accessing capital by the insurance industry in order to hedge against a future catastrophic occurrence. The insurers reduce the possibility of incurring heavy losses by purchasing reinsurance. The mechanism works as follows: Primary insurance company pays a premium to purchase a Catastrophe Reinsurance contract from Reinsurance Company. Reinsurance Company then sells its bonds in an amount equal to the catastrophe reinsurance contract issued to insurance company. These are called Catastrophic Bonds. The proceeds from the bonds sold by reinsurance are then placed in a trust to securitize the reinsurance contract. Interest is earned on the proceeds placed in the trust. It was because of reinsurance that Mumbai and Gujarat floods did not have any significant impact on the balance sheet of Indian insurers as they are protected by reinsurance cover. 95 per cent of their risks were reinsured under the catastrophic insurance cover.

38Role of insurers in hazard identification and risk prevention and control Hazard identification

39For any industry to be successful, it has become essential to identify the hazards, to assess the associated risks and to bring the risks to tolerable level. The insurer may make continuous best efforts to identify the Hazards and to bring the risk levels to tolerable levels. Risks defined at the various levels matched with probability level and the case of intolerable, substantial, moderate and tolerable risk may be fixed.

40Hazards spread across areas. Use of periodic surveys, inspections and observation (both formal and informal), historical data can be made to identify the various hazards. Keeping track of socio-economic changes, understanding climatic changes, identifying urban/other concentrations, evaluating existing risk paradigms, pre risk mapping and predicting future scenarios

41Exposure assessment is made on the basis of density/concentration (people/ assets). The higher is the density, the higher is the risk.

42Vulnerability (intensity) estimation can be used to calculate damage ratio. Then, estimation of probable maximum loss (PML) is made. Any good program must make sufficient provisions for readiness for the unexpected.

43Risk control / prevention

44Once the hazards have been identified and risk assessment has been made, the efforts must be made to eliminate those risks that can be prevented or avoided altogether and to control the intensity of the losses. Risk prevention and control is an effective risk management. Mandatory risk control may be applied in some areas by the insurers following efforts:

• Enforcement of Land use planning & building code enforcement.
• Strengthening of building codes.
• Compliance with environmental laws.
• Fire prevention rules compliance.

45An insurance system operates successfully when many people or business firms faced with similar exposures transfer their potential losses to a pool, paying a relatively small premium for the right to collect loss payments from the pool. An insurance system will breakdown completely when only the most exposed want coverage. Therefore, private insurers may fail to provide coverage:

46Where the loss potential is catastrophic.

47The loss potential is mostly restricted to areas most exposed.

48The Government at the state and central level has the ability to restrict the use of loss prone areas.

49Those people most exposed or most likely to have claims would be most likely to purchase coverage.

50Generally, the insurance programs provide coverage for the following:

51All the catastrophe insurance programs offer coverage for buildings and most for contents. Coverage for residential buildings and contents against the risk of natural disasters typically represents the main focus of catastrophe insurance programs.

52Some covers losses due to business interruption.

53Some also included provisions for emergency living expenses in the immediate aftermath of a disaster.

54Coverage as a rule bundled with fire/homeowners policy but in certain cases is sold on a stand-alone basic risk and aggregation at sub-national or national level prior to its transfer to international reinsurance markets.

55Although rates tend to vary insignificantly and in some cases are kept flat, most frequently they are tied to the nature of the risk and are not subsidized and generally very high.

56India’s vulnerablability to catastrophic losses:

57India is also exposed to a number of catastrophic risks which include drought, floods, cyclones / storms, earthquakes, tsunami, terrorism attacks, etc. The most recent catastrophes that happened in India have been Maharastra (Latur) earthquake (1993); Gujarat cyclone (1998); Orissa (super) cyclone (1999); Gujarat earthquake (2001); Tsunami (2004); Mumbai/Gujarat/Bangalore/ Chennai floods ( 2005); Kashmir Earthquake (2005); Flood Gujarat (2006). As mentioned earlier that 2008 have been the costliest year in terms of catastrophic losses. According to estimates of Report of Home Ministry(2008) ‘Nearly 3,500 people lost their lives in the country this year due to floods which also damaged over 20 lakh houses and led to the deaths of 45,000 cattle. Over 35.18 lakh hectares of cultivable land have also been damaged due to floods in 21 states and the Union Territory of Pondichery.’ On 26 Nov, 2008, one of the most violent terror attacks on Indian soil happened in Mumbai. An unprecedented night attack was made in the city as terrorists used heavy machine guns, including AK-47s, and grenades to strike at the city’s most high-profile targets - the hyper-busy CST (formerly VT) rail terminus; the landmark Taj Hotel at the Gateway and the luxury Oberoi Trident at Nariman Point; the domestic airport at Santa Cruz; the Cama and GT hospitals near CST; the Metro Adlabs multiplex and Mazgaon Dockyard - killing at least 101 and sending hundreds of injured to hospital.The attack was big bolt to the financial strength of the country. BCCI incurred a loss of Rs 120 crore due to the cancellation of the Pakistan tour and the two one day matches against England that was to be held in the month of December. The stock market, both Bombay Stock Exchange and National Stock Exchange remained closed on next day. According to Munich Re ‘India ranks 10^th on the basis of number of natural disasters in 2008.’ (See Exhibit 1.2)

58Current funding scenario in India

59By now, the Government of India’s means of coping with catastrophic risk has largely been restricted to relief measures and the finances spent even for relief has been less than sufficient. A National Disaster Framework has been built up covering institutional mechanisms, disaster prevention strategy, early warning system, disaster mitigation, preparedness and response and human resource development. The expected inputs, areas of intervention and agencies to be involved at the National, State and district levels have been identified and listed in the roadmap. To a certain extent mitigation is taken care by Village Disaster Preparedness Committees (VDPCs).

60The current funding has 2 components:

61National Fund for Calamity Relief.

62NCCF i.e. the National Calamity Contingency Fund.

63The NFCR is meant to be used for immediate relief and rescue operations. It is allocated state wise every 5 years by the Finance Commission. There is also a yearly allocation made to individual states on the basis of the state public expenditure. Different States can have State-specific norms to be recommended by State level committee under the Chief Secretary. Where the calamity is of such proportion that the funds available in the CRF will not be sufficient for provision of relief, the State seeks assistance from the National Calamity Contingency Fund (NCCF) - a fund created at the Central Government level. On receipt of requests, the requirements are assessed by a team from the Central Government and thereafter the assessed requirements are cleared by a High Level Committee chaired by the Deputy Prime Minister. Currently, the amount remaining at the end of 5 years can be used by the states for planned expenditure.

64Apart from Budgetary Allocations, Public Contribution Funds like ‘Prime Minister Relief Fund’ is also existing in the current scenario.

65Prime Minister Relief Fund

66It was set up in 1948. The resources of the PMNRF are now utilized primarily to render immediate relief to families of those killed in natural calamities like floods, cyclones and earthquakes, etc. and to the victims of the major accidents and riots. Assistance from PMNRF is also rendered for medical treatment like heart surgeries, kidney transplantation, cancer treatment, etc. The fund consists entirely of public contributions and does not get any budgetary support. The corpus of the fund is invested with banks in fixed deposits. Disbursem*nts are made with the approval of the Prime Minister. Statement of Income and Expenditure for last five years is presented in Exhibit 1.3.

67Catastrophic insurance in India

68In India, to provide insurance, companies must be registered in order to insure risks within the country (with the exception of marine cargo, which can be covered based on the terms of sale). Foreign investment in non-life ventures was limited to 26 percent, recently increased to 49% in Dec, 2008. When insurance is unobtainable from a local insurer, a petition may be made to the Insurance Regulatory and Development Authority (IRDA), India’s insurance regulatory authority, to insure internationally.

69Insurance in India for catastrophic risks is more a political-economic issue than social-economic issue. To date, there has not been a significant insured natural catastrophe in India.

70General Insurance Corporation (GIC) and the major European professional reinsurers based in Continental Europe and Asia performs the lead role in reinsurance. GIC Re continues to have the leading presence overall in the Indian market, providing the most reinsurance capacity for all classes of reinsurance.

71Major Risks

72Demand for earthquake reinsurance is increasing. India is a seismically-active region, and is prone to some of the world’s largest continental earthquakes. However, the frequency of large earthquake events is lower than for other earthquake-prone countries in Asia, such as China, Indonesia and Japan.

73Cyclone is a significant peril in India, and flooding can often follow cyclone activity. Bay of Bengal is more exposed to the damages of cyclones, although the tsunami that struck India’s southeast coast in December 2004 emanated from an underwater quake in the Indian Ocean. Infrastructure projects in rough terrains and for buildings in crowded urban environments are also exposed to catastrophic risks. Tea and other crops are prone to hail damage.

74Availability of insurance

75Windstorm insurance is provided in a standard commercial/industrial fire and special perils policy. Insurance cover for wind losses encompasses losses resulting from destruction or damage directly caused by storm, cyclone, typhoon, tempest, and tornado. Flood is also covered under the standard fire and special perils policy, as are subsidence and landslide - including rockslide (subject to certain exclusions such as the normal cracking, settlement, or bedding down of new structures) and coastal or river erosion. Earthquake risk is addressed by an extension to the fire and special perils policy, and it covers damage following earthquake and shock. Fire following earthquake can be added. An estimated half of all commercial and industrial property policies in India carries earthquake cover. Hail insurance is included in tea crop covers. Insurance for strikes, riots, and civil commotion (SRCC) is readily available and includes cover for malicious damage. Terrorism is covered by a pool managed by the GIC, the sole reinsurer in the Indian insurance market. Local underwriters are prepared to cover terrorism risk, subject to a surcharge which is passed onto the pool. The pool covers acts of terrorism, as well as loss and damage caused when a lawfully constituted authority is suppressing such acts. Fire and special perils policies are also increasingly popular among home and apartment owners and tenants. These homeowner policies address fire and numerous additional perils, such as lightning, explosion, smoke, impact, riots, strike, malicious damage and weather events.

76Some specific suggestions for catastrophics insurance

77As already discussed, catastrophic insurance is different from other insurance contracts. Therefore, all countries need to adopt a different strategy for creating effective insurance solutions against catastrophe losses.

78System of insurance

79A system of insurance that meets the following requirements will suit the requirements of the country:

80It is affordable and accessible to all kinds of people, including the poor especially in high risk prone areas. As long as the insurance is voluntary and unsubsidized, it will only be purchased when it is a less expensive or more effective alternative to existing risk management strategies.

81It compensates for catastrophic income losses to protect consumption and debt repayment capacity.

82It should be feasible to provide given the limited kinds of data available in most developing countries.

83Private sector should be in a position to provide with little or no government subsidies.

84The deductibles, co-insurance and surcharges should not be so harsh that it renders coverage levels meaningless. It avoids the moral hazard and adverse selection problems that have happened most in case of agricultural insurance programs.

85Initiatives by the government and other agencies

86Local level of Government can add a small levy to the property tax, which can be used to buy insurance of the property against catastrophes.· Flat owner’ s cooperative societies in urban areas must be mandated to recover insurance premium along with maintenance charges and arrange insurance against catastrophes. All lending institutions, including, housing loan corporations, Corporations, Central & State Governments, etc, must obtain insurance or cause insurance to be obtained, against catastrophes on compulsory basis. Similarly all house building societies and organizations like Urban Development Authority, City Development Authority, which are involved in constructions, must be mandated to insure against catastrophes.

87National catastrophic insurance pools is highly recommended

88National catastrophe insurance pools should be built up through professional operations, adequate prudent investment policies, tight restrictions on the use of funds, and a system of checks and balances embedded in the governance structure. Government should be financially involved in paying for losses resulting from catastrophic. It should be ensured that best international industry practices are used in the pool’s operations and risk management and primary sources of risk funding.

89Ray Spudec (2005) suggests a proposal that envisions three layers of riskbearing capacity before the Government events.

90Layer 1: Private Insurers with a few innovations

91In this layer, property insurance is supplied by the private markets as it is done now, with the insurers deciding how much of the risk they wish to retain and how much they want to transfer to private reinsurers. The first innovation being proposed is to allow the private insurers to develop reserves against future catastrophic losses on a tax-deferred basis. The most familiar solution based on this premise in the U.S. is the National Flood Insurance Program (NFIP) administered by the Federal Emergency Management Agency (FEMA). In this program, private companies write flood insurance policies for the NFIP but the program retains all the risk. It is an insurance program in name only, as the premiums charged by the NFIP do not by design reflect the actuarial risk of loss for any particular insurance policy written. Moreover, coverage is restricted. Residential structural damage is limited to $250,000, commercial property structural damage is limited to $500,000 and these limits have not been updated since March, 1995. Contents coverage may be purchased separately, with a policy limit of $100,000.

92Compliance coverage (Law and Ordinance) is limited to $30,000. Coverage is mandatory in flood zones.

93Layer 2: Risk Pool funded by private insurers but managed by the State

94It is based on state or regional catastrophe funds or pools.

95In Switzerland, for example, coverage for all natural catastrophes, except earthquake, is mandated in property insurance policies. Private insurers as well as State-owned canon specific insurers, pool these risks together and an average actuarial rate is determined and charged by all insurers. The markets and regulatory community have noticed that the Florida Hurricane Catastrophe Fund did a remarkable job of stabilizing the Florida market and cushioning the impact of the $22 billion loss from the 2004 hurricane season. While California has its Earthquake Authority, it has had only limited success in the market, with only about 13% of property owners participating.

96Layer 3: A National Mega-Catastrophe Fund providing coverage for both natural and man-made catastrophes

97Beyond the second layer capacity created by the state or regional funds is an overarching national pool for extreme catastrophic losses. This mechanism allows for aggregate risk pooling of natural and defined man-made catastrophic risks funded by the set-aside of premium payments in the exposed lines of business over a phase in period.

98In order for an insurance company to participate in the fund, they would have to establish the tax-deferred reserves. State participation would also require the establishment of a state or regional fund with a meaningful level of participation. Amount of funds that could be released to pay losses would vary between natural and man-made catastrophic events to allow for the maximum use of private reinsurance, and the fund would have a maximum cap.

99Both France and Spain have created risk pools for mandated natural catastrophe coverage that result in the state assuming the risk on an unlimited basis. With regard to terrorism risk, France, the United Kingdom, and Spain have programs that place the risk of terrorist acts with the state on an unlimited basis, while Germany assumes the risk with a capped ceiling.

100World Bank suggested the creation of a China Catastrophe Insurance Pool that either directly or as compulsory reinsurer, provides insurance for all private residential dwellings and SMEs for major natural hazards in return for a premium. This generic model is already used in a wide range of countries and states (Turkey, California, Japan, New Zealand, France etc) and has been successful. CCIP shall be.

101A public corporation managed by an independent board of directors with exemplary insurance industry, financial and related experience. Directors shall be independently nominated by several government ministries (e.g., MOF, MOCA…), private industry, and the China National Academy of Sciences.

102The fund will be funded through private sources and financially self-sustainable, and managed according to sound actuarial practices and subject to government insurance regulations.1

103Ex-ante risk reduction by individuals and whole communities.

104Established in a timely manner according to a schedule specified by the State Council.

105Strong mitigation measures

106Any Insurance proposal must focus adequately on mitigation and must provide for effective measures to reduce losses. All stakeholders must be included in mitigation efforts - central, state and local governments, businesses and consumers, and, most importantly, the insurance industry. The proposal should promote building and relocation efforts away from high-risk areas.

107Area-based index insurance

108It avoids the possibility of adverse selection because buyers in a region pay the same premium and receive the same indemnity per Standard Unit Contract (SUC), moreover, the insured’s management decisions will not be influenced by the index contract, eliminating moral hazard. A farmer with hail insurance, for example, possesses the same economic incentives to produce a profitable crop as the uninsured farmer. It could be very inexpensive to administer, since there are no individual and no individual loss assessments. It uses single data on a single regional index, and this is based on data that is available and generally reliable.

109Micro finance options for insurance

110Micro-insurance is the provision of insurance to low-income households. Low income households pay a small premium for limited coverage in the event of losses. Micro-insurance offers direct financial risk transfer services and thus disaster risk management tools to low income households. Micro- finance can work as an effective tool for selling insurance, either to the group as whole, or to individuals who might wish to insure their loans. Recent developments in micro- finance also make area-based index insurance an increasingly viable proposition for helping poor people better manage risk.

111Major insurers and reinsurers should be mandated to expand use of such schemes.

112Additional sources of risk could be covered under such schemes.

113Trend will drive insurers to make efforts for additional financial risk management.

114It will promote capital market

115Terror cover

116Recent events have proved that terrorism insurance is now must. Companies end up buying only small quantities of terrorism cover for their fixed assets but rarely buy a terror policy to protect them against claims from outsiders. For the risk of terrorism, the German Government has started a scheme where in private insurers share in a new-venture specialized insurance company that provides only terrorism coverage. Gains and losses are shared by the participating companies, with the German government offering only limited financial guarantees. In the United Kingdom, private companies formed a mutual insurance company (Pool Re) that provides its member companies with terrorism reinsurance. The government acts as the residual backstop on an unlimited basis.

117Management of catastrophic insurance programs is in one way or another held accountable to the Government. The Government can act as the aggregator as it is best suited given its financial ability to handle the scale of operations. If an efficient method is to be developed, public private partnership is pivotal to cope with catastrophic risk.

118Private insurer can map disaster prone regions, identify the population Below Poverty Line (BPL) and assess the value of their economic assets. Such type of risk assessment and risk modeling would help determine the economic loss due to disasters. It would facilitate accurate premium requirements to compensate for actual losses.

119A part of the funds allocated for relief measures by Government can be used as the premium amount for insurance cover. Private Insurers should be given the incentive to maintain tax deferred reserves. During the years when disasters do not occur, the insurance companies should be mandated to provide a certain percentage of premiums to the Government for developing infrastructure for ex ante risk management. Compulsory catastrophe coverage may be enforced. Though it does not guarantee full compliance, but it is likely to significantly increase insurance penetration among homeowners compared to other solutions. Strong mitigation measures are undoubtedly is the backbone of any risk management mechanism. It can play an important role in the reduction of risk in disaster prone areas.