Though over 350 people died and nearly 200 others are still missing in the major landslide that occurred in Wayanad, Kerala, on July 30, people are unlikely to get benefits as they are largely uninsured. Properties worth hundreds of crores were destroyed in the landslide. Insurance sources said normally less than 10 per cent of the people and property are covered in any region in India, leaving a huge gap without protection. They will have to depend on the government and other agencies for compensation and rebuilding of houses. The global average for insurance protection is 54 per cent.

In February 2024, the Standing Committee on Finance of the 17th Lok Sabha recommended that the government should explore options as to how homes and properties, especially those of economically vulnerable groups, can be insured in areas susceptible to catastrophic damages with the aid of Central/ State Government. “This may require a specialised insurance business to be set up by one of the public sector general insurance companies with subsidised premiums for disaster-prone areas. Such insurance businesses have been established in many other areas, such as Florida which is subject to regular hurricane damage,” the committee said.

In 2010, after Cyclone Nilam hit Tamil Nadu, the insurance industry and the Finance Ministry jointly planned to set up an exclusive catastrophe pool to cover the losses that occur in natural disasters. The proposal for the INCIP would have cost up to Rs 5,000 crore, if applied across India, and brought down the present undefined bill to rebuild lives after the catastrophes, providing a big comfort to citizens, the government and the insurance sector.

However, a natural catastrophe insurance plan is yet to take shape, said an insurance sector official. The Standing Committee also proposed that IRDAI should set up a working group with all concerned stakeholders to examine all these issues in detail and then provide appropriate policy recommendations to address this important set of issues.

Insurance companies, especially public sector GIC Re, had proposed catastrophe bonds — or Cat bonds which are common in developed countries — to raise funds for meeting claims. Even this has failed to fructify.

“NatCat (natural catastrophe) risks are largely uninsured and the governments (State/ Centre) often provide some monetary compensation/ relief when a catastrophe strikes. The recent tragedy in Wayanad is an example. There will be cries for having a NatCat Insurance Scheme but it will be soon be forgotten till the next NatCat strikes,” said KK Srinivasan, former Member, IRDAI.

A major challenge will be to formulate a voluntary common catastrophe rate for the entire market. If the rates are too low, premium will not be sufficient to cover the risk and the pool will not be viable, officials said.

India has been ranked third after the US and China in recording the highest number of natural disasters since 1900. By disaster type, India is marred mostly by floods.

“What we need is a public-private solution, say a Disaster Pool, for natural disaster risk involving the insurance sector could offer many benefits over government crisis loans and grants,” says a report prepared by State Bank of India last year. “If we consider 2020 floods in India, the total economic loss was of $7.5 billion (Rs 52,500 crore) but insurance cover of only 11 per cent,” the SBI report said. Apart from human losses, there is huge economic loss due to these disasters. Since 1900, India has suffered an economic loss of $150 billion (where the loss is reported) with largest loss from floods ($92.1 billion) followed by storms ($44.7 billion), the report said. In India the intensity and frequency of natural calamities, especially cyclone, have increased manifold. “Further, the cyclones in west coast (Maharashtra, Gujarat) in increasing, which has not been witnessed in the past. However, around 8 per cent of the total losses are covered. So, there is around 93 per cent protection gap during the period 1991 to 2022. So, early intervention is needed to close the protection gap, which are in all lines of insurance,” the SBI report said.

The Standing Committee said that the natural disasters can cause a lot of damage to infrastructure in India, a country that faces many natural hazards because of its demographic and geographic features. Also, many houses are not safe enough to resist earthquakes and floods. These factors make them very prone to damages resulting from natural disasters.

CAT bonds fail to take off

Public sector GIC Re which was earlier planning to raise funds through CAT (catastrophe) bonds found it unviable as the interest rates in India are high. In developed countries like the US and Europe, reinsurers mobilise funds through Cat bonds at lower costs so that they can pay huge catastrophe losses. A CAT bond is a security that pays the issuer when a predefined disaster risk is realised.