Natural disasters in the form of recent floods in Northern India and the Biparjoy cyclone in Gujarat have caused loss of human life and the economic impact is huge.
The heavy toll on infrastructure due to these type of natural disasters is a matter of grave concern for the country like India where the locational and geographical features render it vulnerable to a number of natural hazards. While the current status of economic loss due to these floods is yet to be estimated, we believe this in the range of Rs 10,000-15,000 crore.
India has been ranked at 3rd position, after US and China in recording the highest number of natural disasters since 1900. India recorded 764 instances of natural disasters (Landslide, Storm, Earthquake, Flood, Drought, etc.) since 1900 with 402 events occurring during 1900-2000 and 361 during 2001-2022, indicating the preponderance of tail events at an alarming frequency and each such event setting new records of economic stress. By disaster type, India is marred mostly with floods. Almost 41% of disasters occurred in the form of floods followed by storms.
The question is how do we cope with frequent natural disasters in India? Apart from the typical issues of planning up of urban infrastructure, the crucial issue of protection gap (defined as typically the losses that are uninsured) is almost neglected in a country like India.
For example, out of the total $284 bn global economic losses, natural disasters resulted in $275 billion in 2022, of which $125 billion were covered by insurance (incurred losses). The overall protection gap has increased to $ 151 bn in 2022, which is much higher than the 10-year average of $130 bn but still at around 54% of the total losses uninsured. Though still large, this is less than the 61% average protection gap of the previous 10 years.
For India this figure is a staggering 92%. In effect, In India, an average Indian is insured of roughly 8% of what may be required to protect a family from financial shock following the death of the breadwinner. This means having savings and insurance of just Rs 8 for every Rs 100 needed for protection, leaving a protection gap of Rs 92.
What we need is a public-private solution, say a Disaster Pool, for natural disaster risk involving the insurance sector could offer many benefits over government crisis loans and grants. If we consider 2020 floods in India, the total economic loss was of $7.5 billion (Rs 52,500 crore) but insurance cover of only 11%. If Government would have insured it, then the premium for the sum assurance of Rs 60,000 crore would have only in the range of Rs 13,000 to Rs 15,000 crore.
The lessons from COVID-19, from the need for improvements in public health and business preparedness to the availability of new data on mitigation measures and business impacts, provide an opportunity to reduce future pandemic impacts and enhance insurability. The insurance sector and governments need to actively engage and discuss how best to address the potential contingent liabilities.
We need out of box solutions for addressing these natural disasters and the general lack of awareness even across businesses in ensuring protection gap for workers. In the MSME sector, only 5% of the units are insured in the country. This sector needs much higher level of protection.
In such a case, the Government may launch a partnership programme to cover the MSME employees and provide social security to them in terms of insurance benefits and income protection for their families by way of Insurance Scheme for MSME Promoter to cover losses in business due to reasons beyond control of the promoter.
The contours of such a programme could involve bonus to MSME entrepreneurs for running business sustainably for more than 10 years, with regular payment of Interest to bank and taxes to Government. Even the bank can annually provide 0.5% of interest earned into a linked account with lien and after successful running of business with no default , the corpus build in the lien marked account should be paid to the borrower as a mark of recognition of running business with fulfillment of all financial discipline, with the clause that it should be used for welfare of the employees!
In a similar vein, under PM-JAY, the beneficiary is currently at 120 million in an effort to provide affordable quality healthcare to more citizens. The Government can provide PM-JAY to all the residents with OPT-IN facility.
Soumya Kanti Ghosh
Group Chief Economic Adviser, State Bank of India.
