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The coastal Indian state of Kerala suffered an estimated economic loss of $4.5bn due to the floods that ravaged the state in August this year. Kerala has demanded that the federal Indian government provide additional resources to rebuild the state’s damaged infrastructure.

Kerala’s demand for additional resources has initiated a debate about how to make additional resources available for such relief and reconstruction activities in the aftermath of natural catastrophes, especially when the level of insurance penetration is extremely low. The insurance penetration in Kerala is estimated to be even below the national average for India.

Natural disaster tax to fund relief measures

The Finance Commission of India recently discussed central and state-level financing of disaster relief, disaster financing preparedness of the country and international best practices.

The Indian government has also set up a committee comprising several state finance ministers, to assess the feasibility of introducing a tax under the goods and services tax (GST) regime to fund disaster relief. Kerala at its own level has proposed a levy of 10% over and above the state GST to raise additional funds for rebuilding the damaged infrastructure.

Exposure of infrastructure is common

Phoenix CRetro Reinsurance chief executive Kirill Savrassov speaking with Asia Insurance Review said, “With different levels of insurance penetration and market development, all large countries have something in common – exposure of critical infrastructure to various natural catastrophes.

“Also because of their geographical expanse, countries like US, India or Russia obviously have some or many of their areas geographically positioned in ‘peak zones’, and at almost anytime could face a sudden, devastating hit that could adversely affect overall economic development.”

“This wide exposure and the enormous insurance protection gap, especially in case of countries like India and Russia because of their low insurance penetration, plays havoc with their economies,” said
Mr Savrassov.

No country is better off

It is not that developed countries like USA that have satisfactory levels of insurance penetration are any better off. Interestingly, in 2012 when superstorm Sandy hit north eastern parts of the United States, only 50% of the economic losses was covered by insurance. The US is one of the most economically advanced area of the globe with the highest penetration figures.

“The increase in frequency and severity of natural catastrophes due to climate change and the relatively weak macro level role for insurance yet, countries have to find a wider and better solution how to protect themselves and secure their long-term stability,” said Mr Savrassov.

He said this solution can be achieved by “transfer of risk to the capital markets on the sovereign or sub-sovereign (state) level by issuance of catastrophe bonds.”

The time is right to take catastrophe risks to the capital markets

Mr Savrassov said, “Definitely, for India the time has come to pay attention to the potential transfer of large catastrophic risks to capital markets, so lead the way for the entire Asia.

“Large countries like India can easily follow the successful US example, where such issues of financing reconstruction activities are resolved at the state or even municipal levels. Very similarly, India can identify its most exposed areas and arrange a proper peak protection for them.”

The cost of issuing and managing catastrophe bonds is cheaper than the cost of reinsuring these risks. Capital market-linked instruments like catastrophe bonds ensure that relief and rebuilding activity is carried out unimpeded and not stalled for want of capital.

Sponsoring catastrophe bonds, including ones that use parametric triggers, could become one of the most effective risk-transfer instruments to resolve the developing issue of the protection gap and eliminate the problem with underinsurance.

UNISDR report places India in the top five that suffer largest losses from disasters

A report published by the United Nations Office for Disaster Risk Reduction (UNISDR) in October this year, indicated that India lost $79.5bn due to natural disasters from 1998 to 2017.

The report, jointly prepared by UNISDR and the Centre for Research on the Epidemiology of Disasters, and titled ‘Report on Economic Losses, Poverty and Disasters for 1998-2017’, ranks India among the top five countries in the world with the largest losses from disasters.

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