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Sri Lanka - Disaster insurance to government's rescue

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Source: Asia Insurance Review | Aug 2016

In May, Sri Lanka was hit by the worst floods in 27 years which experts believe was a result of climate change. They caused economic losses of over US$2 billion. A disaster insurance scheme undertaken by the Sri Lankan Government and facilitated by the country’s sole reinsurer National Insurance Trust Fund (NITF) enabled the Government to promptly respond to the calamity and help thousands of affected citizens. We speak to key stakeholders from the industry to understand how insurance was used as a key mechanism by the government in the disaster recovery process.
By Jimmy John
 
 
Global warming and climate change are the grim realities of today’s times and the Indian subcontinent faced the brunt of this in 2015 and continues to do so in 2016. 
 
   According to Swiss Re’s sigma report, the total economic losses from natural catastrophes in 2015 amounted to US$80 billion, out of which Asia’s share was $38 billion. 
 
Insurance can support countries in disaster recovery
This year in May, massive flooding in 21 out of 25 districts in Sri Lanka destroyed or damaged more than 125,000 houses and over 300,000 small-and medium-sized businesses and resulted in over 100 deaths. 
 
   The Sri Lankan Government’s National Natural Disaster and Emergency Relief Insurance scheme, launched with the backing of NITF in April this year, helped thousands of affected individuals and businesses to get quick relief.
 
   A number of insurance organisations worldwide including the Geneva Association, have been advocating the positive role that insurance can play in supporting countries and individuals both before and after natural catastrophes. 
 
   Through NITF, the Government of Sri Lanka has insured all uninsured citizens and properties by obtaining a CAT reinsurance cover of LKR10 billion (US$68.3 million) from major reinsurers worldwide. 
 
   Under this reinsurance cover for 2016-2017, NITF has the capability to settle claims up to LKR2.5 million (US$17,080) for any uninsured property that is affected by a natural calamity. Fishermen would be compensated up to LKR1 million for loss of life due to natural disaster while fishing at sea, and all citizens are covered for LKR100,000 in the event of death due to natural perils. 
 
   “People from all walks of life have begun to appreciate the value of the insurance and reinsurance industry and so we need to grab the opportunity and carry this message across the entire country, as people will give us a much better hearing than they would have done before this disaster took place,” said Mr Manjula De Silva, Chairman, NITF, on the opportunities that have been created to promote insurance in the country.
 
NITF to the rescue!
Following the floods, NITF was able to respond to the situation very fast. It attended to a number of cash calls from its clients immediately. 
 
   “We were able to provide an assurance to the primary insurers who are reinsured with NITF that all claims can be met with the support of the retrocession cover we arranged at the beginning of this year,” said Mr De Silva. 
 
   In addition, as the insurer of the Government of Sri Lanka, it provided funds for emergency relief operations that took care of over 400,000 displaced persons. 
 
   Mr De Silva also said NITF intends to compensate all home owners and small scale entrepreneurs who suffered damages to their houses and business premises under the Government sponsored National Natural Disaster Insurance Scheme which was launched recently. 
 
Insurers must improve underwriting skills
Since the insurance industry is usually hit in any major CAT event, one of the biggest challenges that it faces today is in knowing where their exposures and peak concentrations lie. 
 
   “While socio-economic factors play an important role and are often underestimated, it is expected that the frequency and severity of weather related events will further increase due to ever-changing weather patterns together with the impact of higher values and concentrations of exposures,” said Mr Prakash Schaffter, Managing Director, Janashakthi Insurance. 
 
   The insured losses from the Sri Lanka floods are expected to cross $150 million as a large number of vehicles and property were damaged and close to 100 human lives lost. This is just a fraction of the estimated economic losses of over $2 billion. 
 
   “Insurers are now looking at categorising risks and using analytics for natural catastrophe coverage in order to enable themselves to make better business decisions,” said Mr Schaffter. 
 
Balancing the protection of balance sheets and protection of lives and assets
According to him, the industry will increasingly look at segment and area-specific risks so that those prone to incidents such as floods and earthquakes could be viewed differently than the others. 
 
   “Insurers need to balance the need to protect their balance sheets with their purpose to provide protection for lives and assets and one way to ensure optimal balance is to focus on quality underwriting and create incentives for individuals and corporates to focus on loss prevention,” said Mr Dirk Pereira, President, Insurance Association of Sri Lanka and CEO, Union Assurance. 
 
   He mentioned that charging a fair premium which will pay for future losses is also important to ensure the sustainability of the local industry. In addition, companies must have adequate reinsurance arrangements in place to mitigate losses, he said.
 
Insurers as influencers in society 
Asia has an alarming underinsurance problem – too few people have adequate protection in the event of catastrophes. 
“The financial component of disaster risk management and mitigation strategies, which involves risk transfer and compensation strategies, is also important for reducing the financial impact of catastrophes on individuals, businesses, and governments,” said Mr Arup Chatterjee, Principal Financial Sector Specialist, Asian Development Bank. 
 
   In this context, he believes that insurance and reinsurance products can offer solutions to finance immediate post-disaster recovery needs by providing immediate liquidity. 
 
   Mr Pereira is of the opinion that the insurance industry responded admirably to the calamity in Sri Lanka organising themselves to assess and settle claims as soon as possible. 
 
   “In the case of commercial claims, some companies have contracted the services of international loss adjustors to supplement local resources,” added Mr Pereira. 
 
   The critical role played by the Sri Lankan insurance and reinsurance industry in the wake of the floods provided a glimpse of the vital contribution that the sector can play to the world economy. 
 
   “The insurance industry can assign an economic value to risk, advocate for climate change action, and serve as a catalyst to reduce both physical and financial risk through mitigation,” said Mr Chatterjee. 
 
   Hence most agree it can be a key influencer in changing societal behaviour and contribute to minimising loss.
 
Snippets from the players
 
Commendable response from insurers
 
Interview with Mrs Indrani Sugathadasa, Chairperson, Insurance Board of Sri Lanka (IBSL) on the positive image created of the industry as a result of the prompt response by the NITF and insurers.
 
The Meteorological Department in Sri Lanka had predicted a stronger-than-average south-west monsoon season in 2016, which was the result of a weakening El Nino and this is expected to persist into the second quarter of 2016. 
 
   “Though Sri Lanka frequently experiences intense rain from South-west monsoon and flooding, the recent devastation was unusually severe at an early stage of the rainy season that could be a result of unauthorised land reclamations, encroachments and illegal constructions that had taken place over the years,” said Mrs Sugathadasa. 
 
   Without the marshlands, the city is unable to absorb the huge amount of water that comes with the heavy rains. 
 
   “It is true that El Nino had a major impact in the sequence of extreme weather conditions in Sri Lanka, but inappropriate human activities have contributed in aggravating the damage,” she said.
 
Insurance industry response 
Just six weeks prior to the disaster, the government paid LKR300 million (US$2.05 million) as premium to purchase its first national natural disaster cover from the NITF, the national reinsurer registered under IBSL. 
 
   This insurance cover helped the government, through the NITF, to promptly compensate affected citizens for loss of life and damaged/destroyed property. 
 
   “The response of the insurance industry to this calamity was commendable as they organised themselves to assess and settle claims as quickly as possible,” said Mrs Sugathadasa. She is of the opinion that though the economic losses are quite high, the disaster is not expected to have a significant impact on insurance companies due to appropriate transfer of risks through reinsurance arrangements as per the IBSL regulations.
 
Opportune time to promote insurance 
With the floods creating a positive image of the insurance industry, Mrs Sugathadasa believes it is high time for the industry to make the masses aware of the importance of insurance as a risk mitigation measure.
 
   “Given the present insurance penetration level of 1.09%, which is comparatively low, there is huge potential for growth, especially, in light of the economic growth tied with increase in awareness and more importantly, the interest shown by the government in insurance,” she said. 
 
   The industry, she feels, should take innovative steps to bridge the protection gap. “The Sri Lankan insurance industry could take a leaf out of the Japanese Tohoku earthquake and adopt similar procedures in taking the message of insurance to the masses,” she added.
 
Companies need to implement ERM
Mrs Sugathadasa feels that all insurers will need to implement enterprise risk management (ERM) processes within their organisations. 
 
   “Upon identification and assessment of exposure to all types of risks through ERM, the insurers would be in a better position to recognise their exposure to Nat CAT risks,” she said. 
 
   Based on the same and upon conducting a cost-benefit analysis, they should be able to consider the requirement of using Nat CAT models.

 

 
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