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Business News/ Money / Personal Finance/  Climate change and changing insurance needs
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Climate change and changing insurance needs

Always factor in inflation in the current cost of treatment while determining the sum assured

A woman sits beside a cracked wall of her house at Joshimath in Chamoli district (AFP)Premium
A woman sits beside a cracked wall of her house at Joshimath in Chamoli district (AFP)

The land subsidence at Joshimath has suddenly become the epicentre of climate change discussions. Hundreds of people have lost their homes and livelihoods. There is a looming question—are claims for houses destroyed by subsidence covered under insurance? Strangely, until the event, subsidence had never been discussed as a major risk for home insurance. Uttarakhand has in the past put the spotlight on other recurring natural catastrophes. We ought to pay attention to these catastrophes and assess the ways in which they could impact us. Additionally, we should be conscious of the fast pace of climate change, and consider related risks specific to our surrounding geography.

Environmentalists attribute manifestations such as land subsidence to activities like road widening, deforestation, dam building, changing the course of rivers, and decades of reckless construction. Many of these factors affect major metropolitan cities. However, the manifestations could be different. For instance, Delhi suffers from extremely poor air quality for extended periods of time, and the air quality worsens with each passing year. This has a direct impact on health and life expectancy.

We must prepare ourselves adequately for anticipated and unanticipated epidemics and catastrophes. For example, our health insurance coverage needs to account for a higher frequency of hospitalization and a higher average cost. When determining the sum assured, we should not only factor in the current cost of treatment, but also budget for inflation. Currently, medical inflation is higher than the general rate of price increase. It is strongly recommended to supplement health insurance policies with critical illness insurance. Some illnesses, such as cancer, have a long treatment cycle, and treatment in later stages occurs outside of the hospital, but is still expensive. A critical illness policy can help cover these costs.

The insurance industry has a significant catch-up to do with the implications of changing climate. This has both pros and cons for policyholders. The most significant pro is that insurers have yet to quantify the impact of such climate change in their pricing. Currently, regardless of the air quality in a specific location, whether in Delhi or Uttarakhand, policyholders are charged the same premium for their life insurance. In fact, for commercial property insurance policies, insurers charge the same premium for flood risks in Rajasthan and Orissa. Therefore, pricing linked to air quality index (AQI) is still below the radar. There are two principal cons. Policyholders are devoid of innovative products that can help mitigate these risks. The other drawback is the foregone advantage of advocacy, which insurers can very effectively do. Charging a differential premium based on micro-geographical conditions raises the collective consciousness of society to appreciate the risks better and nudges local governments to act.

Our reaction to climate change is akin to the proverbial ‘frog in boiling water’. We continue to adapt to the deteriorating circumstances without realizing the long-term implications. We should act before it is too late. While subsidence is covered in home insurance, the more pertinent questions to ask are: how many homes are insured? Are there government policies that encourage the purchase of such insurances? While the incident in Joshimath happened now, we should also check if we followed all scientific recommendations in seismically volatile geology. People living in metros should reflect on if the median household now has more electronic gadgets than plants. The world continues to see multiple ongoing catastrophes, and the frequency and severity continue to rise. 2022 was one of the worst years in recorded history and 2023 is expected to be a hotter than 2022. While insurance can mitigate some of these challenges, it is not the long-term solution. Unless the rapid pace of development becomes more ecologically sensitive, we will continue to face climate-induced adverse events.

Abhishek Bondia is principal officer and managing director at and Praveen Gupta is former CEO of Raheja QBE General Insurance Co Ltd.

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Published: 29 Jan 2023, 10:56 PM IST
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