One look at the newspapers, any day, any country, and one notices that the news relating to some catastrophic event ( Cat event ) – whether manmade or natural – dominates the headlines. Maybe there is a little bit of exaggeration here, but the fact of the matter is that the phenomena of Cat events has become more pronounced than before and is here to stay.
Let us look at the impact that these Cat events have on the society and individual.
The immediate impact of the Cat event is disruption of the day to day life of people. Shortage of food, drinking water, disruption of means of communication and destruction of property and life (both animals and human beings).
The medium term impact is reflected in the need for immediate restoration of the means of communication, houses, restoration of drinking water and food items and performance of the last rites of the people dead. The animal carcasses need to be removed carefully, as this is the time when there is every probability of an epidemic hitting the affected area.
The long term impact is the one that is the cause of concern for some of us more than the others. It is the psychological impact which continues to give nightmares to people. A sense of insecurity takes over and invariably, cases of panic attack, post traumatic stress disorders ( PTSD) and sleep apnea and sleep deprivation becomes common.
The statistics show that the Asian region has seen a dramatic rise in the Cat events in the last 3-4 decades as compared to earlier times. The population of the world has not shown any signs of receding and the effect on the world resources is being observed as shortage of food, water and resources. And this is worrisome keeping in mind that the world in general and the United Nations in particular identify the following challenges for the next generation:
Global Terrorism
Climate Change and
Global Ageing.
Each one of the above mentioned factors could lead to a fall out where losses could be huge and large. Accumulation of such losses is what is the cause of concern for the Insurers and the Reinsurers.
To elucidate the first point related to Global Terrorism, your attention is drawn to the loss of property and lives that happened due to the crash of the Twin Towers at the World Trade Centre, New York City. This can be best explained through the diagram below:
Loss Distribution By Type Of Insurance From September 11 Terrorist Attack ($ 2015 billions)
(1) Adjusted to 2015 dollars by the Insurance Information Institute using the U.S. Department of Labor BLS Calculator.
(2) Loss total does not include March 2010 New York City settlement of up to $657.5 million to compensate approximately 10,000 Ground Zero workers or any subsequent settlements.
Source: Insurance Information Institute.
The idea behind showing this Loss distribution is to bring to fore what types of Insurance policies would be needed in this type of a Catastrophic loss. Our Indian experience is not so different when it comes to the attack on the Taj Hotel, Mumbai or the attack on the Parliament.
The second challenge viz the impact of the global climatic changes has hit everyone to an extent, where the Insurance world is struggling to cope with the results of the climate changes and the rates of the Re Insurance premium have gone north.
The global climatic events like the Typhoon Mireille ( Japan), Hurricane Charley ( US, Cayman Islands, Cuba etc), Hurricanes Wilma and Rita, the Tsunami and nearer home the Kosi Floods (2008), the Bhuj Earthquake (2001),Cyclone Fani (2019), Kashmir Floods etc have all brought to the fore that there is a huge gap between the insured and actual losses that we witnessed.
The Global Underinsurance report of Lloyds way back in 2012 had pointed out the following:
And if we look at the financials pertaining to the major Funding agencies for reconstruction following any of such Cat events, the results are startling.
Can we actually have the Government funding another Bhuj earthquake kind of event ?
The third major challenge relating to all of us- is about the increase in longevity of an average man / woman across the Globe.
The average life expectancy in India in the 1940s was just about 32 years and we stand at about 70 years today. This is majorly attributed to the developments in the medical sciences in the country. However, what escapes our attention is the fact that these elderly people would need medical attention, apart from a host of other infrastructural support. Hence the need of Insurance policies catering to their specific requirements- the challenges and problems of gerontology have to be addressed by the Insurers.
We have become a hub of Medical Tourism and a host of ” ancillary industries ” pertaining to hospitality sector have mushroomed. And so have the developments for the Insurance sector.
What we see is that a majority of the population across the globe takes care of the medical expenses by spending out of their own pockets. And the expenses are increasing year on year- medical inflation is a major part of the same.
The above chart is just indicative of the way the medical spendings have been increasing over period of time.
Most of the Insurers do not have a health policy for people in the age bracket of 70 years and plus.
So we also have an opportunity of entering a big market there.
While we understand the Cat situations in case of Global Terrorism and Climate change, we also must recognise the “time bomb” that the Global Ageing is likely to cause as a challenge, globally.
As identified above, the 3 factors mentioned above have the potential to be major sources of Cat events and the Insurance Industry has yet gear up to face the challenges posed by them. There have been discussions between the stakeholders regarding ways and means of handling such losses, but we need to arrive at a conclusion and implement the same.
We need to have solutions and prompt solutions because we are losing precious time and that is the point where we need to examine the role of the Parametric solutions vis a vis the Catastrophic losses / disasters.
Let us begin with what exactly is a parametric solution for the Catastrophic Losses .
This is an innovative way of transfer of risk that some of the major Reinsurers of the world advocate.
Based on an agreed factor basis or triggers, the insurance cover becomes operational over a specified area and comes into play in case of breach of the agreed factor or triggers.
The Wikipedia defines Parametric insurance as a type of insurance that does not indemnify the pure loss, but ex ante agrees to make a payment upon the occurrence of a triggering event. The triggering event is often a catastrophic natural event which may ordinarily precipitate a loss or a series of losses. But parametric insurance principles are also applied to Agricultural crop insurance and other normal risks not of the nature of disaster, if the outcome of the risk is correlated to a parameter or an index of parameters.
Traditional Insurance indemnifies the insured party for its specific loss from an insured risk or event, and the insured must inform and document the loss to the insurer. The parametric insurance, on the other hand, pays the insured an agreed , pre-determined amount upon one or more specified parameters being met.
In case of natural catastrophes, the parameters could be wind speed, strength of a hurricane, amount of rainfall, the magnitude of an earthquake or such similar triggers for a specified geography.
Thus, parametric insurance is ideal for low-frequency but high-intensity losses as in catastrophic perils, weather-related risks in agriculture or other economic activities, and risks sought to be covered without sufficient history of losses captured as insurance-readable data.
Unfortunately, today, the governments still rely more on post event financing of Cat events, rather than pre event financing.
The traditional policies pertaining to the Fire line of business, which covers the perils of Flood, Inundation, Rains, Earthquake, Storm, Tempest and Cyclones etc are good, however they have major drawbacks when it comes to claims, both processing and settlement for a larger number.
This kind of a policy is ideal for individuals, because any and every loss under the policy would have to be surveyed and assessed by a Surveyor and a Loss Assessor. But how does one assess and survey the inundated town where 100% houses are insured against the perils of Flood and Inundation ?
Each and every house would have a different level of damage, to begin with and each and every house would need to be surveyed !
The parametric insurance covers do not have the concept of individual surveys- when the loss is triggered, or the agreed values breached, depending upon the third party data ( could be due to flood, then IMD, could be due to earthquake, then the Richter scale point ) is referred to and the claim amount is released. This process normally takes about 2-4 weeks time in all.
The second major advantage that we see is the utilisation of the claim amount. Each and every agency which funds such reconstruction of the losses, have their own ways of checks and balances: For instance, the World Bank aid could specify that the money should be spent primarily to take care of compensation for deaths only, or may be just to pay for the reconstruction of dwellings, or may be just to pay for the compensation of dead cattle. The claim amount paid under a parametric insurance policy is free from such clauses- one can utilise the amount for necessities like restoration of road transport, or communication or may be eatables ! The prerogative is that of the insured.
Such policies typically are taken by the Governments and thus the insured here is the Government.
Each and every state government has its share of the State Disaster Relief Fund, which can be utilised for payment of premium for such kind of policy. And one does not need to have any sanction from anyone because the Finance Commissions have been appealing about such activities for the last 15 years.
There are many countries like Mexico, Philippines, Bangladesh etc that have existing parametric insurance covers, proven right time and again.
As discussed earlier, we may be running out of time on account of the amazing pace at which the world moves. The speed with which the disasters strike us and the way we reconstruct again.
The time has come for us to work jointly, and I mean the stakeholders in this series, to have risk mitigating measures for such Cat events, or else there would be no legacy that we leave behind for our children.
Authored By:
Pratik Priyadarshi
Associate Professor
Birla Institute of Management Technology
Greater Noida ( UP)
