A Working Group,formed by the segment regulator IRDAI, has proposed the setting up of an Indian Pandemic Risk Pool, with a capacity of around Rs 75,000 crores,to address losses and unsettlement caused to the informal and low income sectors of the society and serve as a medium of providing relief to these sectors by the government in case of any pandemic or epidemic events in future.
The Working Group (WG),which was headed by Suresh Mathur, executive director, IRDAI, has proposed a government backstop of around Rs 75,000 crores at the initial stages of the Pool..
Suggesting that a risk pooling mechanism with public-private-government participation would be an appropriate resolution in terms of a low-cost insurance solution to address concern on any massive losses and disruptions out of a probable Pandemic in the future. the WG has said that the Indian Reinsurer, GIC Re, which has experience of managing the Indian Terrorism Pool and Indian Nuclear pool in India can be an apt administrator for the proposed pandemic pool.
Claim payment to the insureds will be parametric in nature.and multiple trigger mechanism will be set separately for an epidemic and a pandemic event, said the panel.
In parametric claim settlement system, a pre-agreed payment for a claim is guaranteed upon the occurrence of a triggering event, which needs to be a pre-defined parameter or metric related to the insured’s particular exposure.
The participation will be mandatory for the sectors which have been covered under the pool. This can be provided as a Standalone Product coverage for the event or as an add-on with the existing products.
The panel has recommmded that the ideal size to start the pandemic pool could be designed to cater around 4 crore MSME workers which would lead to a pool capacity of around Rs 75,000 crores wherein a capacity of approximate Rs 2000 crores could be expected from the industry participants and a substantial part coming from government in the form of backstop.
“We are now putting the report on the formation of Pandemic Pool for the public feed-back and will soon set up the Pool,'' said SC Khuntia, chiarman, IRDAI..
The pool will provide coverage in a phased manner. As MSME and the unorganized sector are the worst affected segments of society during the current COVID-19 pandemic in India, first phase of the pool can cover Income losses due to non-damage business interruption resulting from a future pandemic event and subsequent lockdown.
Pandemic losses are covered under presently available health insurance products, hence the coverage for losses in health segment caused due to a Pandemic event, beyond a threshold, may be covered under the Pool in the second phase.
The coverage under the pool may be expanded to life insurance segment also in the later phases.
The WG believed that for pandemic pool to have an adequate purpose, it needs to cover at least 4-5 crores MSME workers in first phase and to accomplish that, the assurance from government to provide a backstop is necessary. The backstop will triggers only at the event of pandemic striking and the total loss payouts are higher than the capacity garnered by the local insurance/reinsurance and international market.The Working Group has proposed a government backstop of around Rs 75,000 crores at the initial stages.
With an assumption of 4 crore employees and workers getting benefited and pay-out is limited to 3 months maximum, then the total pay-out will be Rs 78,000 crore, the report said.
"As per recent Indian Nuclear Insurance Pool (INIP), it is recommended to start with pandemic pool of Rs 5,000 crore. The remaining amount of Rs 75,000 crore will be required as backstop guarantee from the Government of India," it said.
During the subsequent phases, the pandemic coverage will be extended to other lines of business, then the exposure will go up and the government backstop requirement will peak up to Rs 1,25,000 crore and then it will start gradually reducing, it said.
Approximately 20 to 25 years will be required to grow the pool size to make it self-sufficient.
Globally, all pandemic pool (including USA, France, Germany) proposals are heavily hinged on their national government’s support in form of similar backstop and are at different stages of approval.
The pool premium collection is proposed to be invested in government securities or specifically designed bonds by Indian government. The premiums accumulated over the years and the Investment surplus would help in gradually reducing the government backstop
According to the WG,Pandemic risk being a systemic risk it is too large to be taken on by the public and /or private insurance sector or governments alone. To protect individuals and the economy from suffering because of business failure due to such epidemic/pandemic events in future, it was considered appropriate to explore the option of risk sharing by public, private insurers with the Government of India in form of an Indian Pandemic Risk Pool. Mechanism of sharing this risk would provide a lowcost product.
Currently,though business groups have suffered huge losses due to business interruption, they can’t get insurance claims as most of their policies exclude pandemic cover.
One -time stimulus by Government equivalent to such huge proportion of GDP is not economically viable each time a pandemic occurs.
The panel has said post lock down, due to Covid-19 Pandemic the Medium, Small and Micro Enterprises, who were unable to handle the financial burden were forced to make tough decision like furlough staff or close their business altogether.
The pandemic risk exhibits accumulation potential across several lines of insurance business, for example life and health, travel, liability, credit and others. Moreover, the asset side of an insurer’s balance sheet is also affected by the adverse market conditions caused by the economic impact of the response to a pandemic.
According to the Insurance industry these factors constrain the supply of insurance. Therefore, it is evident that cover for pandemic risk
cannot be provided solely by private commercial insurance and reinsurance systems.
As per current data , there are 6.35 crore MSMEs across rural and urban India which provide employment to 10.8 crore individuals (with 5 crore in rural and 6.1 crore in urban India). 3.6 crores of such employees are in manufacturing; 3.9 crores in trading and 3.6 crores in Services. 24% of 10.8 crore employed in MSMEs are females. Amongst states – Uttar Pradesh, West Bengal, Tamilnadu, Maharashtra and Karnataka form top 5 concentration with 50 per cent of them employed in these states.
Further, 96% of such MSMEs are proprietary based depicting their smaller size and hence higher vulnerability to social impact to its employees during a lockdown preceded by such pandemics.