As New Year eve for 2024 approached, thousands of residents of Tamil Nadu found a reason to smile. The State announced a relief package of ₹1,000 crore to aid those affected by Cyclone Michaung. At a cost of ₹385 crore, 4,577 new houses will be constructed, and 9,975 houses will be repaired; a special loan scheme will be implemented to help small traders, shop owners and street vendors in Chennai, Thoothukudi and Tirunelveli.

While such measures are helpful and most welcome, they result in burdening the State finances and despite the best intentions are often insufficient to aid complete recovery. According to a report by Swiss Re, out of the losses of $34 billion suffered by India due to natural disasters in the last five years, more than 90 per cent were not insured. Without adequate insurance cover for the general population owing to low penetration of both life and non-life insurance, such losses inevitably cause diversion of development funds to support the disaster recovery and rehabilitation.

Although the Union government in the past has often come to the aid of the State governments during major disasters, it too has budgetary limitations. Furthermore, the process of the Centre providing relief can get impacted by federal-State bargaining where States are usually in a weaker position to negotiate. Hence, there is a need for State-wide disaster risk financing systems in India.

Public-private partnerships

A combination of public sector schemes and private insurance programmes has been promoted in the agriculture sector. Pradhan Mantri Fasal Bima Yojana and Restructured Weather Based Crop Insurance Scheme were launched by the Government in collaboration with insurers to safeguard the interests of farmers. Outside agriculture, insurers cover risks to properties from floods and earthquakes (as additional cover in fire insurance policies). However, in addition to the financial constraints due to low penetration and substitution effects of public sector schemes, the coverage and timely payouts by private insurance programmes remain problematic.

On the front of timely payouts, the working group report published by the National Institute of Disaster Management in 2021 advocated adopting a parametric approach to insurance. Unlike traditional insurance, this would offer pre-specified payouts based upon a trigger event without the need to carry out assessments post the trigger event. Assessments in the event of disasters remain a challenge in designing insurance products given the investment of time and resources. Thus, by negating their requirement, parametric solutions can facilitate immediate upfront relief in the face of disasters. Recently, Nagaland implemented such a scheme in collaboration with Tata AIG and Swiss Re.

The parametric approach, however, can be effective only if the insurers have a large base for premium collection and are effectively backstopped to cater to such calamities. This continues to be a challenge as the insurance penetration remains low due to lack of financial literacy. While the financial literacy will improve along with the literacy rates and, hopefully, through the joint efforts of the government and insurers, there will still be a need for effectively backstopping the insurers. A sovereign catastrophe pool insurance system might be a solution worth considering.

A sovereign catastrophe pool insurance usually consists of a public-private partnership which establishes a fund through which individuals are paid after a disaster. Insurers who offer the scheme route the premium into a common fund. The government can either subsidise a part of the premium or contribute a certain amount of money annually to the fund. Eventually the government can step back and withdraw from putting in money once the fund is self-sustaining or international re-insurers are willing to back up the fund. The government then manages and oversees the scheme usually through a board system.

Risk management pools like the California Earthquake Authority, Australia’s Household Resilience Program, and the Turkish Catastrophe Insurance Pool are excellent examples of non-profit establishments that collect premium from insured firms and some additional contributions from government, helping in managing risk up to a pre-decided limit.

Pool insurance is highly relevant for vulnerable populations where private insurers are not willing to provide insurance. It also acts as a buffer before the government needs to step in, and thus is good for the fiscal health of a country. Additionally, it provides upfront relief to the insured during critical time.

States must reach out to insurers and work towards creating bespoke sovereign catastrophe risk pools for prudent disaster risk management. This would reduce budgetary pressures, which impact a State’s ability to achieve desired growth rate, and empower the States to continue their pursuit of prosperity at the potential GDP of the State.

Shroff is Managing Partner, and Goswami is Director — Public Policy, Cyril Amarchand Mangaldas