Page 89 - India Insurance Report 2023- BIMTECH

India Insurance Report - Series II 77

relationship between the reserves required and the reinsurance premium. Since insurance companies
focus on making large claim payments in years that are extremely bad, insurance needs to be complemented
by other mechanisms like contingent funds that finance smaller, more frequent events to widen coverage
and keep premiums affordable.

Moreover, traditional insurance purchases are often made through “high-touch” transactions, where
the nature and extent of a company’s interaction with the buyer and/or end user involve extended
conversations with an agent or broker. Unfortunately, small ticket insurance policies often cannot
support costly distribution. Today, insurers often look to alternative channels - such as financial
institutions, utility companies, retail chains, and even telecommunications operators - to reduce costs
and expand the scale of insurance by leveraging their existing infrastructure and customer relationships.

5. Pooling Arrangements

Pooling is basically done to bring down the portfolio risk of insurance. Theoretically, if there is a pool
at the national level, the government can retain the high-frequency and low-severity risks and transfer the
less frequent and more severe risks to insurance and reinsurance companies. In good years, when the losses
are less than what has been estimated, the pool can accumulate reserves. Over time, this will allow the
government to retain more risk, transfer less risk, and demand a preferential insurance premium.
A regional pool can also be established on similar lines, where many countries can diversify a
portion of their risk by sharing with the pool to stabilize their losses. By putting in place such an
arrangement, there is one level of risk sharing at the national level; then, there is the next level of risk
sharing at the regional level before transferring risk to the international reinsurance and capital markets.
This helps bring down the overall cost of insurance and makes it more affordable.

If they truly desire to improve preparedness and manage the impacts of residual risks, governments
should actively consider setting up dedicated catastrophe insurance pools for ring-fencing additional
revenues mobilized via taxation. Embedding insurance - together with an integrated approach to disaster
and climate risk management - will enhance the quality of risk financing decisions.

Such a pool can help optimize risk retention by covering less severe but more frequent losses with
low return periods and transferring less frequent but more severe losses through reinsurance and alternative
risk transfer solutions, which are recognized for making rapid and predictable payouts transparently. If
losses are lower than expected, the surplus can accrue to the fund, and if there is a deficit, it justifies the
need to raise more revenue.

A good example is New Zealand’s Earthquake Commission, which established in 1945 a National
Disaster Fund, which had over $6.1 billion in accumulated funds before the 2010 Christchurch and
Kaikoura earthquakes, financed by levies paid by citizens as part of their home and contents insurance
policies and investment returns. The Commission purchases reinsurance to meet first loss claims in the
event of a major natural disaster, allowing all the money to be used if necessary. The Commission can
also receive additional financial support from the government to meet all outstanding claims if the fund
is fully spent until the 2010 events; this option, known as the Crown Guarantee, was never used.