General insurance in India is a poor second cousin to life insurance. That is because life insurance impacts people directly whereas general insurance, consisting of products like fire, liability, engineering and marine insurance, is usually purchased by companies. It typically gets relegated to an unimportant compliance under the ambiguous moniker of risk management. This explains why the general insurance penetration in India is just 0.7% of the gross domestic product (GDP) compared to the world average of 2.7%.
General insurance deserves more attention because the cost of getting it wrong is high. It impacts the economic well-being of companies severely and, by extension, you as much as life insurance does. I’m using a few recent, well-known catastrophes to illustrate the kinds of issues in general insurance.
The National Museum of Natural History in Delhi, established in 1978, was destroyed in a fire on 26 April 2016. Most of the exhibits were ruined. I now wish I had spent more time in the museum rather than at the chaat stalls at the nearby Bengali Market. Will insurance cover the costs of restoring the museum, or will the burden fall on the tax payer? I foresee some issues.
The first will be to determine the value of the destroyed artifacts. Standard fire insurance values contents at book value depreciated over time. That will be meaningless in the museum’s case because the items were acquired many years ago and, in several instances, they may not be a purchase price available. This issue can be prevented if the value of the contents is set on an agreed value basis that captures the replacement cost of items. I hope that was done.
Standard fire contracts restrict the sum assured of curios or works of art to small amounts. That exclusion should also have been removed in the museum’s insurance.
Finally, there is the matter of underinsurance. If the insurer determines that the museum had a sum assured less than the actual value of the goods, then any claim payment is likely to be proportionately reduced.
The implication of any of these seemingly small decisions will run into millions of dollars.
Uttarakhand forest fires have been raging for over 80 days now. Several thousand acres of land have been burned. But forest fire damage is an explicit exclusion in our fire insurance policies. Most likely, the ecological and property damage will run into billions of dollars, of which, a small amount will be insured and an even smaller amount placed properly with forest fire exclusion removed.
Contrast this with the forest fire raging in Alberta, Canada. The likely insurance cost is said to exceed $7.5 billion, and several agencies have publicly stated that forest fires are standard covers. In many cases, the cost of relocation will also be covered.
On 31 March 2016, the Vivekananda Road flyover in Kolkata collapsed killing over 25 people and injuring 80. The papers reported that the builders termed this an “accident" and an “act of God" with alacrity. Why? Perhaps because the construction company would have bought a contractors’ all-risk insurance where damages due to accidents and acts of God are covered but design defects or use of substandard material are excluded. There will be a long claims discussion between the insurers and the insured on the cause of the collapse. But it is the families of those who died that will suffer most, as their claims will take years to settle. This is another example of how thinking through the insurance before buying can make a material difference.
In 2004, a shipping company claimed damages to four barges destroyed by the tsunami that hit our east coast. This claim was rejected on the grounds that the tsunami was caused by an earthquake, which was excluded in the insurance. The decision was contested, and recently the Madras High Court said the claim was payable. It has taken 12 years for this decision to be taken by the courts and, most likely, the matter will be appealed. I discussed this case with a London-based marine insurance expert who said that in the US and Europe, insurance clauses were routinely amended to include earthquakes, and that such a claim rejection would generally not have taken place in the first place.
The issue of poorly placed insurances and litigations is not unique to India. In fact, there is more room for disputes overseas because policy wordings can be changed by insurers. In India, in products such as fire insurance, the contracts are standardised across insurers. The main advantage that markets like the US, the UK, Australia and South Africa have is that dispute and grievance handling is swift. Experts knowledgeable about insurance matters adjudicate cases. General insurance is an area where we should welcome international expertise. The exposure and understanding in many other markets is advanced. There is also a need to develop alternate grievance handling for general insurance claims. Currently, ombudsmen are not allowed to handle large general insurance cases, and regular courts are the only option. We should actively consider separate institutions to deal with insurance claims.
Better policy wordings will also help. If you pick up any general insurance contract, it is filled with cryptic statements such as “basement warranty," “wait and watch warranty," “insured versus insured," and so on. For a large number of buyers, this is gibberish whose meaning becomes clear only when a claim is made.
Predicting catastrophes is hard, and controlling them is harder still. However, building general insurance depth and penetration is one of the best ways to manage the outcome of catastrophes.
Kapil Mehta, co-founder, SecureNow Insurance Broker Pvt. Ltd