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Unit 12: Health and Catastrophe Insurance

floods, earthquakes, cyclones and hurricanes, and also against man-made disasters for instance Notes
terrorist attacks. These high-cost and low-probability events are normally excluded from standard
hazard insurance policies, and thus the need of catastrophe insurance arises.
Catastrophe insurance is unlike from various other kinds of insurance in that it is hard to
estimate the entire potential cost of an insured and protected loss and a catastrophic event
results in an extremely large number of claims being filed at the same time. This makes it
difficult for catastrophe insurance issuers to effectively manage risk. Reinsurance and retrocession
are used along with catastrophe insurance to manage catastrophe risk.

Trends in Indian Catastrophe Insurance Market

Following are the various trends in Indian catastrophe insurance market:
After opening up in 2001, the non-life insurance market in India has developed into a
competitive market with 27 public and private firms. Despite some barriers to growth,
available statistics suggest some potential.
One of the major areas for growth is the disaster insurance, a market in which Indian
insurers bear less than 5% of the total economic cost of disaster claims. The industry could
play a major role in removing the burden of post-disaster relief from government.

Clearly there is a need for a shift in disaster risk management from micro-risk, ad hoc,
needs-based post-disaster recovery in favour of a long-term integrated approach that
emphasises a pre-disaster investment in risk reduction and adaptation. Insurance-linked
securities are a means of ceding insurance-related risks to the capital markets.
Many countries have meaningful mechanisms for disaster risks, with involvement by
private insurers a common feature. For the Indian market, potentially prohibitive
insurability issues will need a public-private partnership involving Government subsidy
to provide coverage to those unable to afford it.
Overall, creating alternative risk-transfer instruments for the Indian insurance industry
would be a more efficient approach to disaster risk management, and also provide an
opportunity for better growth in the Indian insurance industry.

Caselet No Catastrophe Insurance Cover Yet

n the wake of the natural disaster in Uttarakhand, the proposal for ‘catastrophe insurance’
is in spotlight. Early this year, non-life insurance companies had presented a concept
Ipaper on catastrophe insurance to the National Disaster Management Authority
(NDMA). The concept paper highlights the need for a pool mechanism to deal with losses
from catastrophic events. In the absence of such a pool, both insurers and reinsurers have
to bear the cost, leading to a big hit on their profitability.
However, it is still stuck as a concept because there has been no consensus between the
insurers and NDMA on who would fund the process and how the pool will function.

Officials from the general insurance sector said that while they had presented their case to
the finance minister, a formal decision is yet to be taken.
A senior official of a public general insurer said that the model of insurance in this category,
means of settling claims, reimbursements to NDMA and other authorities are areas are
Contd...

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