Pandemic Pool: Is this the best the insurance sector could come up with?

In case of a calamity, the govt may need to step in to help those at the lower rung of the economic ladder and it may not need the insurance sector as a middleman in those circumstances

In the middle of a financial crisis, the insurance companies have managed to create a difficult situation for the central government. They have asked for the setting of a humongous Rs 75,000 crore 'Pandemic Pool' by the finance ministry, in the process putting the insurance regulator in a difficult position. 

The basic idea of the pool is to underwrite the financial ability of the owners of medium, small and micro sector units, so that they do not have to lay off employees if another Covid-19 like pandemic strikes. It will not apply to the current crisis but the money will sit in a pool earning interest for another such eventuality. The insurance companies will float a mandatory policy for all such units (which number about 63 million), collect the premium and transfer it to the pool. When another similar epidemic strikes and there is a lockdown, the companies will begin the payout, financing these units for a period of one to three months, by when it is expected the crisis would have passed. 

How India’s leading insurance and reinsurance companies (GIC Re, Munich Re, Axa India, United India and Bajaj Allianz) could come up with a plan like this also says a lot about the leadership of the sector! Calamities are bound to occur in the twenty-first century as we have become painfully aware. Covid-19 is one of those but will certainly not be the last one, given that the climate change induced risks have not yet begun to play out on a national or even super national level. The implication is that the insurance sector will be challenged each time. But is it the responsibility of the government to mount such a massive rescue operation to just save the sector, which is essentially the role of the proposed Pandemic Pool?

Just compare this report with the balanced view taken by most of the banking industry about offering a moratorium on interest due from borrowers. Both bankers and the insurers examine the same crisis, the economic dislocation created by Covid-19. The similarity ends there. The banking industry has stood with the regulator, the Reserve Bank of India to make a valid point that extending the moratorium for payment of interest on loans will sharply worsen the balance sheet of the banks. More importantly, they have not passed the buck to the government by seeking a bail out. The contrast has consequences in any evaluation of the role of the intellectual capital of the insurance sector vis-a-vis the rest of the financial sector.

In any calamity, the risk of economic impact is likely to be disproportionately high on families at the lower rung of the income ladder. In such a scenario, it will be in the interest of the people for the government to step-in (as several of them have done in the case of Covid-19) to help them. What interest would it serve for the government to have a middleman in the form of the insurance sector in these circumstances?

The alternative as the report suggests of sequestering a Rs 75,000 crore corpus from the very first year, peaking to Rs 1.23 trillion soon for a future disaster is therefore a waste of public money. By what evidence are the companies and the regulatory officials convinced that a Covid-19 plus emergency shall again emerge? It is not discussed in the report at all. Rather, it is most certain that even the weakest government has learnt a lesson on how to prevent a public health emergency for the conceivable future. There are other risks for sure from non-communicable diseases which have been left untreated for now. There are also risks of aggravated malnutrition risks and there are also risks of large swathes of families slipping back under the poverty line as income sources have dried up in this pandemic. But none of those will be addressed by this Pandemic Pool, as it explicitly states. The Pool is only meant to address income loss for employees of MSME sector if there is a generalised lockdown of the economy from another such disease, in future. The insurance industry already has a surfeit of pools, with a nuclear pool, a terrorism pool and plans for a natural catastrophe pool. None of the others demand a contribution from the government. 

Meanwhile for years the insurance companies have been required to collect an annual premium of Rs 999 per employee from every MSME, enjoying a legislative mandate from the government. If a general risk pool was indeed needed, it can be operated at a far lower cost using the ubiquitous bank network since there shall be no evaluation of risks. Everyone has to pay. At the time of the payout the same channel can be used through the direct benefit transfer channel. The presence of the insurers is totally superfluous. The sector shall not bring any underwriting expertise to this business like conceptualising an innovative policy. A mandatory policy shall not need any differentiation among the companies to draw in the public. The report also does not address the concerns that many state governments have over the claim settlement experience with the insurers. In a pandemic it is quite unlikely the states will want to depend on them for providing succour. It is also amazing that insurance companies find no use for investing the money generated by the business to be invested in long term infrastructure projects, which are often starved of funds. Instead they have suggested the money should only be invested in government gilts which will drive up yields all round. 

The concept of this pool is derived from a plan that was debated in the USA and some of the European countries. Most insurers in those territories there are now however convinced that a pandemic is not an insurable risk. It is too widespread like a war or similar cataclysm to offer any insurance cover. The only recourse in such a crisis is for the government to wade in. 

Finally the report underestimates the scale of support the MSME sector shall need. It pens the number of employees who shall need such support at about 40 million. The ministry of MSME estimates the employment in the sector at over 100 million. Going by the ministry estimate, the size of the pool shall have to be treble the current estimate. It is quite possible that the finance ministry shall jettison the report, but that such an off kilter document should come up come from the sector after so much deliberation is the surprise element in this report. The weakness of the report makes it difficult to believe that the regulator had thought this one through. 

For instance, the opportunity could have been used instead to deepen the prospect of a reinsurance market in India to handle deep risks in a crisis. There could have been a useful exercise to examine how prepared GIC Re and other reinsurance entities are to handle different grades of crisis. Such an exercise would have served the aphorism well—don’t let a crisis go waste.

Twitter: @subhomoyb