The understanding of risk has undergone significant evolution since the global financial crisis. Previously, risk meant management’s focus was on deviation from expected values or outcomes, while tail events were considered as anomalies. However, in the last two decades, tail events that were expected to happen once in 1000 years or so, are now occurring with increased frequency / amazing alacrity with each such event setting new records of economic stress. These events in statistical parlance are commonly called fat-tail events and India is no exception to the alarming phenomenon. India, in fact, is one of the most disaster-prone countries in the world. The locational and geographical features render it vulnerable to a number of natural hazards. India has been ranked at 3rd position, after US and China in recording the highest number of natural disasters since 1900. 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 Rs 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.
Recently, the intensity and frequency of natural calamities, especially cyclones, have increased manifold in India. For example, frequency of cyclones in west coast (Maharashtra, Gujrat) is increasing, which had not been witnessed in the past. The real problem is that the protection gap between economic loss and insured gap is significant. For example, 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 are in all lines (life & Non-life) of insurance.
Going by the 92% protection gap in India, thus an average Indian is only insured of roughly 8% of what may be required to protect a family from financial shock following the death of the breadwinner. This means having savings and insurance of just Rs 8 for every Rs 100 needed for protection. Lack of awareness around what is an adequate life insurance cover for an individual increases the mortality protection gap.
A public-private solution, say 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. If we consider 2020 floods in India, the total economic loss was of $7.5 billion (Rs 52,500 crore) but insurance available was only to the magnitude of 11%. If Government would have insured it, then the premium for the sum assurance of Rs 60,000 crore would have been only in the range of Rs 13,000 to Rs 15,000 crore.
Another, and relatively new, trend is the rapid increase in solar power installations. The solar panel market is still relatively nascent, and standards and regulations on the quality and installation are not yet adequately formulated. These may not be immediately visible in short term but natural disasters can destroy the functionality of a panel entirely. Associated insurance claims can be huge. For example, in May 2019 a single hailstorm brought forth a USD 70 million insurance pay-out for a Texas solar farm. Solar energy is a key technology towards our transition to be a low-carbon footprints economy. The vulnerability of solar panels, in terms of loss potential, is an area where the insurance sector can play an important role in helping society mitigate the effects of climate change.
The lessons from COVID-19, from the need for improvements in public health and business preparedness to the availability of new data on mitigation measures and business impacts, provide an opportunity to reduce future pandemic impacts and enhance insurability. 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.
The author of this article is Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
The views and opinions expressed are not of IIFL Securities, indiainfoline.com