An IRDAI working group has recommended the standardisation and simplification of fire insurance covers for homes, offices, commercial establishments and micro, small and medium enterprises.
The working group's report released by the IRDAI on 20 May 2019 contains several recommendations keeping the target market segments and the perils they encounter in focus.
Three variations of a standardised simple fire insurance cover
The working group has recommended a single product for fire and all allied perils for dwellings of any value. It has suggested that all existing products with varying terms and coverages should cease to exist.
Three variations of this standardised and simple fire insurance cover have been proposed. The first variation which would be the basic and the simplest with highly relaxed terms would be for homeowners.
A slightly more refined version would be for micro commercial establishments with a risk value up to INR50m ($0.715m).
Commercial risks with value at risk from INR50m to INR500m would be offered a moderated version of the existing product.
Terms and conditions, coverage and add-ons cannot be changed in the new product
The product in all three variations would be standardised and worked out such that there would be no possibility to change its terms, conditions, coverage and add-ons.
There would be no provision for offering any discount to opt out of any coverage of the product. All cat perils would be covered in the standard base product itself.
Home insurance penetration in India is just about 1%. Hardly 3% of houses in India are insured at present.
All perils, especially Nat CATs would be covered by default
At present, cover for many CAT perils does not form a part of the base product and is sold as an add-on following demand from a customer or a sales push. Earthquakes which have caused large economic losses in various parts of the country are not provided for in a default cover in the fire insurance policy and has to be opted for by express demand according to the working group report.
Vulnerability to catastrophes
Around 60% of Indian subcontinent landmass is vulnerable to earthquakes and other natural catastrophes and at least 38 Indian cities lie in high-risk seismic zones. Furthermore, most Indian cities are densely populated and do not adhere to the best architectural layout standards.
Also, a majority of both residential and commercial premises do not comply with earthquake and flood resistance safety guidelines. These aspects make them highly vulnerable to natural and man-made perils.
In the existing product, all contents are insured for only one year. The report recommends coverage for a longer term.
The panel also recommends that the insured value of apartments in high rise buildings be equivalent to the total saleable price of the unit based on the rates published by the state government concerned.
The policyholder will now have the option to increase this rate if the actual rate is higher than the ready reckoner, but not reduce below it.
Catastrophe bonds recommended
The working group has recommended that the “government funds Nat CAT losses and then buy a reinsurance solution to reduce the volatility of their outgo. There are many countries where Nat CAT losses are funded by government. Two potential reinsurance solutions for government could be: parametric insurance or capital market solutions via catastrophe bonds”.
Low awareness and confusion about products the main reason for low penetration
The poor fire insurance penetration of homes/ dwellings and other real estate properties in India is primarily due to overall low insurance awareness and confusion in the minds of customers due to multiplicity and lack of clarity of the products in the fire category.
Stakeholders can send in their comments on the report to the IRDAI by 7 June 2019.