What are the cat risks Indian market experience?

The major natural catastrophe perils affecting India include tropical cyclones, floods, earthquake, tsunami and droughts. Landslides and hail are also common in parts of India with the latter generally affected standing crops. India ranks among the top ten countries in the world for frequency of natural disaster risks and one of the top in terms of number of people exposed to risks from natural hazards. India is a very tectonically and seismically active region and is prone to some of the world’s largest continental earthquakes.


India can be divided into two broad tectonic regimes: the intra-plate region of the Indian peninsula, and the inter-plate or plate-boundary region of the Himalayan Arc.


The Indian peninsula forms part of the interior of the Indian plate and is regarded as a stable continental region. The Himalayan Arc lies at the northern boundary of the Indian plate. Continental collision between the Indian and Eurasian plates forces the Indian plate beneath the Himalayas and the high plateau of Tibet.


Several damaging intra-plate earthquakes have occurred inland away from the plate boundary and in the stable continental region of the Indian peninsula as the result of compression of the Indian plate as it moves northwards.


Floods are the most common natural disaster in India and almost whole of the country is flood-prone with extreme precipitation events, such as flash floods and torrential rains, have become increasingly common in India over the past several decades. Rainfall in India is mainly dependent on the southwest monsoon with majority of the rainfall (almost 80%) taking place between the months of June to September.


The rest of the rainfall can be attributed to north-east monsoon, cyclonic storms, local storms and cloud bursts. The rainfall in India shows great variations, unequal seasonal distribution and frequent departure from the normal leading to heavy losses to property, motor and crops due to flooding. India has a long coastline of 7,516 kms out of which 5,700 kms is estimated to be exposed to nearly 10% of the world’s Tropical Cyclones which bring with them strong winds, storm surges, and heavy rains.


Cyclones occur in the month of May-June and October-November, with primary peak in November and secondary peak in May. Although cyclones affect the entire coast of India the East Coast is more prone compared to the West Coast.

What is the kind of cat protection gap there in India? Is it going up?

India is seeing high growth rate with increase in construction activities leading to growth in exposure and aggregation of risks. Development, especially in big cities and other urban areas is uncontrolled and pressure is to build on areas that are highly prone to natural hazards without accounting for detailed studies to assess all the exposed risks. On the other hand, investment in infrastructure and drainage may not be keeping pace with the rate of growth.


This rapid and unplanned expansion tends to increase vulnerabilities in an event of natural calamity which together with low insurance penetration, leads to the large protection gap between economic and insured losses that could be as high as 80-90% or more. All these factors contribute to a situation where natural disasters seriously threaten India’s economy and  growth, its population, environment and sustainable development.


Based on UN Statistics flood is the riskiest peril in India with more than 2/3 of India Nat CAT economic losses are estimated to be a result of it. While based on RMS research we found that the insured to economic ratio is only about 7%
in India, which means 1 in 15 although this is just an average based on the last 50 years or so of loss data, and some states have higher financial resiliency than others. However, the stats are changing over time and in 2015 Chennai floods we saw that insurance market shouldered almost 20% of the economic losses.


Is climate change contributing to this?

India has a large number of weather stations with long records from which observed climate trends over the last decades have been derived and published in the academic literature. The past changes can be summarised as follows: There has been a positive temperature trend with temperatures rising for India as a whole; the warming has been stronger in winters than in summers; heat waves have become longer in time; but there are no clear signs for changes in the all India annual and monsoonal rainfall.


The impact of ENSO is still under investigations.
To assess future climate change one of the best references is the Intergovernmental Panel on Climate Change. According to its 5th assessment report (AR5) the warming is likely to continue, there may be some increase in annual precipitation in more northern regions in India, however, this prediction is less certain than for temperature.


There is though quite high agreement that the number of extreme precipitation events, such as ‘cloud bursts’, are likely to increase during the Indian summer monsoon.


The impact of climate change on the number of tropical cyclones is likely to vary by region and there is low confidence in the results, however, there seems to be some agreement that precipitation may become more intense in tropical cyclones. In addition, sea level risk seems to be almost certain, and thus the risk of coastal flooding will increase over time.


This is especially important in large coastal cities such as Mumbai, Chennai and Kolkata. In summary, these results indicate that the risk of flooding may increase and pose increased risk for property, agriculture and motor and thus widen the product gap.
Heat waves typically don’t impact the P&C line of business, but there is general agreement that climate change will impact food production and thus possibly the agricultural insurance in a negative way and might also here lead to a widening of the protection gap.


Is Indian market- reinsurers and brokers, Government- doing enough for closing cat protection gap?

India is set to become the first and the only country to produce a national plan and local strategy targeted at reducing the losses caused by natural calamities. With this global plan, aimed at reducing losses during such mishaps, the country has earned praise from the United Nations at UN 2017 Disaster Risk Reduction (UNISDR) meeting attended by representatives of 176 countries.


The high growth in direct non-life insurance market is mainly attributable to crop, health and motor insurance business. The Indian government has begun to address protection gap, introducing a $3bn+ crop insurance scheme to help farmers cope with crop failure due to natural disasters.


The country’s dependence on agriculture leaves it highly sensitive to extreme weather events with a higher proportion of population involved in the farming sector compared to global average. The market is progressively moving towards a new era of corporate governance with plans for listing of insurance companies in the stock exchange including public owned ones.


Also, with changes in regulations to allow cross border reinsurers to set up branches in India, may lead to increased competition in (re)insurance and need for innovative product development.


The insurance regulator IRDAI has formed 10-member steering committee to help implement by March 2021 the new risk-based capital (RBC) regime that will also enhance protection to insurance policyholders.

What is/will that RMS is offering to the Indian market and in which segments?
RMS provides modelling tools for the P&C and Agricultural insurance segments. RMS has served the Indian insurance market with an earthquake model from as early as 2006, and recently added the India Agricultural Model to quantify agricultural risk in India.


This is highly relevant given the recent steep increase in agricultural risk premiums following the introduction of the Pradhan Mantri Fasal Bima Yojana Scheme by Prime Minister Modi in 2016. The agriculture model allows quantifying both weather-index based (WBCIS) and yield-based insurance contracts, and takes the potential impacts of cyclones and of ENSO into account, while modelling over 70 types of crops for both the Rabi and Kharif seasons.


As discussed above, flood is a largest contributor to economic property and motor losses in India and RMS will be releasing a fully probabilistic flood model and related flood hazard maps to the market in 2018 with its Version 18 RiskLink release.


RMS will be working with the insurance industry to make available the model loss output prior to the renewal date of April 1. This will enable underwriters and risk managers the quantification of risk in a consistent way from the point of underwriting at the location level to assessing and optimizing portfolio risk.


RMS will be also updating its earthquake model to bring the recent significant advances in the application of earthquake science and engineering to the market and thus to provide the most up to date earthquake risk tool for India.


RMS is currently developing a new generation of global agricultural models with a dedicated agricultural team, and will update its India Agricultural Model (IAM) to provide the most up to date risk tool for India.


Do you think Indian market is making use of models for underwriting risks?

With de-tariffing in 2007, the free market found itself in a competitive price war, especially fire & engineering line of business with rates touching rock bottom. It is understood that insurers were forced to retain important business at any price with little or no risk underwriting.


Poor claims experience led to pressure on underwriting profits and capital requirements with investment income helping towards attaining profitable growth to an extent. India is still an evolving insurance industry yet to mature with the risk exposures being diverse and different.


With time, there is now increased focus on scientific risk-based pricing, improving underwriting capabilities and improvement in risk management practices by the insurance companies.


The challenge is to increase awareness about insurance as a means of risk-transfer and to ensure that the insuring public understand it’s benefits and limitations.

What are the other models RMS is developing for Asian markets?

RMS has invested significantly into Asia models and data products in the last years and continues doing so over the next couple of years. In the next two years we will bring a large number of model updates and new models to this fast growing insurance market. RMS strategy is to provide complete and up to date solution to the individual markets.

In 2018 RMS will release its high definition Japan Earthquake and Tsunami model to the Japanese market following the release of its high definition Japan Typhoon and flood model in 2016. This HD Japan earthquake model includes the latest science from the 2017 Japan Seismic Hazard Maps and was calibrated against trillions of Yen of claims data from the Tohoku and Kumamoto events.


 We will also be releasing a new earthquake model for South Korea and an update our Taiwan earthquake model following two new Typhoon and flood models in 2017, resulting in complete solution for these two key markets.


We are also releasing a new typhoon model for the Philippines. Also, the Australia models for earthquake & cyclone will see updates in 2018.
We recently released an update of the RMS China Agricultural Model (CAM) with the latest Terms and Government Protection Program (GPP) conditions 2017 available in mainland China.


In 2019 the focus will be on providing new models for greater China where we will be releasing an update of our existing earthquake model and a new China flood model covering all causes of inland flooding which together with the existing China typhoon and flood model will complete our suite of cat risk models for China. This will not be the end of our plans, beyond 2019 we will continue to building out flood models for the region.