Insurance against climate risks in India has lagged far behind other sectors despite India being one of the world’s most vulnerable nations to the changing climate; severe weather events challenge India’s economy with a set back of $9-10 billion of mostly uninsured losses every year, according to the Indian government’s Ministry of Finance and Department of Economic Affairs newly released Economic Survey.
The survey called for a renewed emphasis on developing India’s underserved climate insurance market to protect and stimulate the country’s economic and social development.
Currently the Indian market is largely dominated by life insurance, with climate-related insurance being primarily limited to crop agriculture cover, after the government introduced schemes to help protect the Indian farming industry.
However, the survey said that despite these initiatives, only an estimated 19% of farmers have taken up crop insurance, leaving the agriculture sector among others still highly exposed to impact of severe weather.
“While General Insurance Corporation of India (GIC) with 52 per cent covers large portion of traditional risks within Indian insurance market, there has only been some recent development of domestic expertise on targeted climate risks.
“India’s insurance penetration rate of 3.3 percent, 2.6 percent of GDP for life insurance and 0.7 per cent of GDP for non-life insurance, is far below the global average of 6.2 percent,” according to the survey.
The government report highlighted some of the challenges facing re/insurers in India, stating that from 2007 to 2015, the public sector’s market share has reduced from 64.4% to 52.4% – making for an increasingly competitive environment.
There are few prominent players in India’s agricultural insurance market, with public owned Agriculture Insurance Company of India Ltd. (AIC) accounting for the lion’s share of the market space; “While AIC is taking several innovative steps and launching products for niche segments – such as Rubber Plantation Insurance, Bio-Fuel Plants Insurance, Mango Weather Insurance, Potato Contract Farming Insurance, Rabi Weather Insurance, etc. – it is unable to effectively cover the entire agriculture sector.
“The company’s net incurred claims ratio of 99.7 per cent in 2015-16 as against 108.5 per cent in 2014-15, clearly shows that there is a need for expansion and more players in the segment.
“The Insurance Regulatory and Development Authority (IRDA) estimates that approximately US$ 7.5 bn is needed to increase insurance penetration to 6 percent, of which US$ 3.7 bn will need to be foreign investment.”
This poses the question of whether, in the current operating and legislative environment, supply is adequate to match India’s growing insurance needs at competitive levels; agriculture cover represents just the tip of the iceberg of the more comprehensive climate insurance schemes the government will need to introduce to come closer to its development goals.
The government survey suggested the market could be given a needed boost through introducing a combination of innovative products and risk models that could “provide huge opportunities to the insurance industry in India.”
Catastrophe Risk Pools (CRP) could help businesses and individuals with proactive financial planning – the government could promote domestic catastrophe risk pools which would facilitate the transfer of risks from households and small businesses to the private insurance and reinsurance markets.
Financial instruments used in creating these could include contingency funds, contingent loans, grants, besides other risk transfer solutions such measures would reduce economic losses from natural disasters and lower impact on the national budget, the survey stated.
As one of the world’s fastest growing economies, Indian re/insurance penetration has a long way to go to safeguard the country’s development.
However, with several large-scale insurance schemes already in the works and the government showing signs of increased awareness of the need to support the re/insurance industry’s development, the future is looking bright for both the re/insurance industry and economic progress in India.