The DRRWG should play a significant role in directing capital flow towards investments that make societies and economies more disaster resilient.
Indian topography is vulnerable to natural hazards: earthquakes, floods, river erosion, cyclones, droughts, and landslides etc.There is a 2/3rd chance now that the 1.5 degree celsius danger mark (above our pre-indusrial average for 1850-1900) for our planet’s warm-up will be hit within half a decade. It’s the point after which we can expect the ecological ill-effects of all this extra heat to proliferate rapidly.
India has rightly been following the Sendai Framework for Disaster Risk Reduction (2015-2030), which recognises that the state has the primary role to reduce disaster risk but that responsibility should be shared with other stakeholders, including the private sector. This Framework advocates for the substantial reduction of disaster risks and losses. It is the successor instrument to the Hyogo Framework for Action (2005-2015) for building the resilience of nations and communities to disasters, which led to the passage of National Disaster Management Act in December 2005, and later the creation of National Disaster Response Fund (NDRF) and State Disaster Response Fund (SDRF). India has now initiated a new worksream in G20 highlighting the importance of disaster risk reduction.
According to Amitabh Kant, India’s G20 Sherpa (“For safety’s sake”, Indian Express, 16 May, 2023), the G20’s new Disaster Risk Reduction Working Group (DRRWG) has recognised the importance of prioritising disaster risk financing:“The DRRWG is expected to offer an extensive overview of disaster risk assessment and financing practices across a wide range of economies, and support harmonisation of definitions and methodologies for data collection and analysis to improve access to global (re) insurance markets, in terms of disaster risk assessment and modelling, affordable and comprehensive insurance coverage of disaster risks, financial assistance and compensation for affected individuals and businesses, and risk transfer mechanisms including catastrophic bonds and insurance for management of fiscal risks. The DRRWG should play a significant role in directing capital flow towards investments that make societies and economies more disaster resilient”. Dr. PK Mishra, Principal Secretary to the Prime Minster (“How to meet a disaster”, Indian Express, 25 May, 2023) has similarly echoed that as the G20 provides a broader platform to drive global goals on disaster risk reduction, there is an opportunity for it take a lead in the implementation of the Sendai framework over the next seven years. The disaster risk financing, as Dr. Mishra puts it, will not be merely about the additional financial resources, it will also include more efficient, effective, and predictable financial mechanisms.
The role of (re)insurers in mitigating risks is paramount, in providing financial protection against climate-related losses, actively working to mitigate the impacts of climate change – assessing and quantifying climate risks and evaluate the potential impacts of climate change on various sectors, including property, agriculture, energy, and infrastructure. One of the core functions of (re)insurers is to transfer risk from policyholders to themselves through insurance policies and reinsurance contracts. (Re)insurers play a vital role in creating disaster risk financing and supporting countries to structure customised financial protection strategies that increase the resiliency of governments, industries and low income population. Parametric insurance and weather derivatives have also been introduced by (re)insurers as an alternate risk transfer mechanism for climate related risks. Weather derivative takes the form of forward contracts or options and its value is decided by a climatic index e.g. temperature or rainfall etc. Parametric insurance products are index based solutions and a pre-agreed pay-out is provided by (re)insurers if the mutually agreed climatic index is breached.
(Ré)insurers actively invest in research and development to develop technologies and solutions that can enhance risk assessment, modeling, and management. For example, (re)insurers are using satellite imagery, remote sensing, and machine learning to assess climate risks with greater precision and accuracy. Global (re)insurance industry is taking lead in aligning their strategies and products with net-zero commitments, Task Force on Climate-Related Financial Disclosures (TCFD) frameworks, and the UN Sustainable Development Goals.
Witha view to bolster the supply side mechanism,the Indian insurance regulators must, in tandem with the global (re)insurance industry and other stakeholders, establish a regulatory framework to enhance the financial capacity of insurance companies to cover disaster losses. In global terms, most countries have gone for Risk-based Capital (RBC) modelling and the advance countries have moved to the economic capital practices. The Insurance Regulatory and Development Authority of India(IRDAI) should have quickly moved capital solvency rules from standard formula to risk based capital and not worked for over a decade now, and correlate the volatility on the balance sheets such as correlation of catastrophe and cyber models to underwriting, credit and market risks. This is needed to be mandated along with risk based pricing and assets & liabilities management. The Capital markets regulator seeks higher disclosure from insurers looking to list, and operate through it. India should be seriously considering implementation of a robust, risk-based capital supervisory framework that achieves Solvency II (prudential regime in EU) equivalence, to increase commercialization of the insurance industry, necessitating better governance, prudence in reserving and shifting focus to profitability over premium income accretion.Further, Insurance Linked Securities (ILS), as instruments for disaster risk reduction, are both unique and appropriate for India. ILS are essentially financial instruments which are sold to investors whose value is affected by an insured loss event. As such,ILS encompass catastrophe bonds and other forms of risk-linked securitization. As securities, ILS can be and are traded among investors and on the secondary-market. They allow insurers to offload risk and raise capital. The necessary regulatory changes will have to be effected around (re)insurance regulations, and establishing workable linkages with taxation and thecapital markets.
On the demand side, for high severity disasters, the parametric solution could be appropriate for protection of NDRF. Since home insurance is not so popular, there could be, for high severity disasters, acomprehensive indemnity-based (mandatory) solution for those who can afford it, and standard parametric product for the below the pverty line segment. Commercial enterprises must optionally go for covering high severity risks. The reconstruction of Government owned assets and public utilities such as school buildings, hospitals, roads, bridges, etc. could be insured through SDRF funds.
In agriculture, the farmers in India are provided support on both the input and output sides. We must shift the nature of support to farmers from input subsidies to investment subsidies. The approach to diversification has to be demand-led, with a holistic value chain framework, from farm-to-fork and not just focused on production. The PM Fasal Bima Yojna (PMFBY) has to be seen in this context. Crop insurance requires a facilitative regulatory role to help increase supply-side sustainability and promote mutuality. Moving from profit-taking to risk-sharing will be seen as a fair deal. All small and marginal farmers must be part of PMFBY.
A parametrized crop insurance against weather conditions covering all farmers – loanee and non-loanee – with actuarial premia to be paid by government and administered by the IRDAI, with robust support from the professional (re)insurers will, from a sustainability and risk-management perspective, will be a better policy intervention than agricultural input and output subsidies. The insurance industry, on its part, must double down on its supply-side tools, and help government strengthen its demand-side instruments since identifying vulnerable areas, recommending adaptation measures, and encouraging the adoption of resilient practices precede insurance transfer mechanisms.
A former CEO, and recipient of Lifetime Achievement Award at the 24th Asia Insurance Industry Awards, 2020 Singapore, Arun Agarwal has been publishing research papers, and has recently edited and authored (along with others) a book, “Time for Bharat”, which raises educated conversations on public governance, in an encompassing way.