Natural catastrophe pool still remains a distant dream

The recent earthquake that hit Nepal and parts of India has brought to the fore the need of a natural catastrophe pool to safeguard against losses from such disasters. While a proposal for such a pool was presented to the National Disaster Management Authority (NDMA), it is yet to take shape.

Sources said that while discussions were on with NDMA, pricing and structure of the pool were not worked out. An official privy to the discussions said that this may be only available for free for those below poverty line, while others have to bear a cost. Also, all areas may not be covered and only those prone to natural disasters would be given the cover.

“Reinsurance of the pool is another area where we need significant presence of foreign capacity. But, we are yet to receive confirmation from all big global reinsurers on this issue,” said an official working on this pool.

Last year, General Insurance Corporation of India (GIC Re) officials had said that they were working on a plan to set up such a pool. The pool was to have a general standardised cover; the risks, to be underwritten by non-life companies, would later to be transferred to this pool.

Currently, India doesn’t have a single cover for all catastrophic incidents. The Insurance Regulatory and Development Authority of India (Irdai) has the country might need it as a separate category.

Two years ago, non-life insurance companies had presented a concept paper on catastrophe insurance to the NDMA. The paper cited the need for a pool to deal with losses from natural disasters. In the absence of such a pool, both insurers and reinsurers have to bear the cost, leading to a big hit on profitability.

However, there has been no consensus between insurers and the NDMA on who would fund the process and how the pool would function. Though the paper was subsequently presented to the finance ministry, no formal decision was taken on the matter.

The general manager of a public sector general insurance company said the primary areas being discussed included the funding process and formation of the pool, the segments of population that would be covered and whether the cover would be applicable across the country or only in regions prone to such natural calamities.

Experts say the General Insurance Council and the NDMA would have to discuss each of these. It would take at least 8-12 months for it to be implemented, they add.

While both the General Insurance Council and Irdai had made efforts to set up this pool, a formal notification on its implementation hasn’t been released yet. Former Irdai chairman J Hari Narayan had cited catastrophe insurance (and pool formation) as one of the unfinished agendas of his tenure.

Last year, Asia recorded the highest economic loss from natural catastrophes and manmade disasters, according to a latest study by Swiss Re. The study, ‘Natural catastrophes and manmade disasters in 2014’ said Cyclone Hudhud, an earthquake in China, and floods in India and Pakistan led to the loss of about 7,000 lives in Asia last year, with the overall economic loss from these disasters estimated at $52 billion (Rs 3.23 lakh crore).