Despite the increasing frequency and severity of Nat CATs in Asia, there continues to be underinsurance in this sector. Speakers at a panel discussion on “Managing Nat CAT risks in SAARC countries” hosted by GIC Re on the sidelines of the 13th Singapore International Reinsurance Conference in November agreed that government and private-sector collaboration is the key solution, particularly for those living below the poverty line.
Describing the current situation, Mrs Alice Vaidyan, General Manager of GIC Re, noted that science still has its blind spots, such that the world continues to face Nat CAT disasters that are unexpected and not modelled.
Mr James Nash, CEO (Asia Pacific), Guy Carpenter, said that there was a huge amount of fungible capital available—the question was how to incentivise people in SAARC to buy insurance, or how to take capital to risk. This may require a joint effort between the government and the industry.
New solutions and policy structures
Mr Nash suggested that a parametric solution could be designed for earthquake risks.
Mr Amer Ahmed, CEO of Allianz Re, proposed that governments and policy makers need to look at a “national” or “supranational” scheme for disaster financing.
“I don’t believe microinsurance or traditional insurance sales mechanisms will solve the problem,” he said. He noted that the current trend tends to be for international aid agencies to appeal for donations in the wake of a disaster, and it would then take weeks or months for help to get where it was needed. Financing before a disaster strikes could reduce costs and human suffering.
Adding that governments and quasi-government agencies have to be part of the solution, he noted: “But governments often end up socialising the cost—which can create the wrong behaviour. We need to create an awareness and understanding of risk instead. For example, someone who chooses to build a house on the coast should understand that he needs to pay a higher premium for his riskier location.”
Mr Sanath Kumar, Acting Chairman-cum-Managing Director of GIC Re, suggested a primary-level Nat CAT policy cover for everyone. He said that this model had worked for below-poverty-line health insurance.
He noted that those below the poverty line tend to expect government support in disaster situations, thus it is necessary to have a risk transfer solution which is “established” and “institutionalised”. The primary cover could be made available through a pool and a public-private partnership, led by the government; but where the insurance community could participate, higher coverage could then be purchased by individuals if required.
Should Nat CAT insurance be compulsory then?
Mr Sivam Subramaniam, Editor-in-Chief of Asia Insurance Review and the panel moderator, noted that these poor communities tended to be religious and leave things to God. He questioned whether Nat CAT insurance should then be compulsory. In response, Mr Nash said that a mandatory scheme could be “dangerous” given the challenge of rolling it out across India’s large population.
Agreeing, Mr Kumar noted that “compulsory” could carry a negative connotation. He said that people could be made to pay a small token sum for the policy as this would make them aware of how they were protecting themselves. The plan could be distributed to the masses via government institutional channels. He added that for this primary-level policy, there should be a shift away from reimbursement of losses to a livelihood cover, in the way that business interruption cover operates for companies, though this approach may require the industry to re-examine what is insurable.
Improving the image of insurance
Panellists agreed that another large issue is the lack of awareness of the benefits of insurance that has affected its take-up rate. “We tend to de-glamourise insurance. We need to publicise it and let the world know it helps in times of need,” said Mrs Vaidyan.
There has been some progress made in raising awareness in India, with educational efforts carried out in schools. As for affordability, the proposed schemes involving the government could help in keeping costs low.
Citing a point he heard before, Mr Ahmed said: “It’s been said that implementing a national-level protection scheme could improve a country’s sovereign credit rating. If that link can be proven, there can be a real economic incentive for governments to get involved,” he concluded.