According to data from the Swiss Re Institute, total insurance premium collections are projected to grow by 7.1% over the next five years (2024–2028). This growth rate significantly surpasses the global average of 2.4%, the 5.1% growth in emerging markets, and the 1.7% average in advanced markets.
Over the next decade (2024–2034), total premiums are estimated to more than double after adjusting for inflation, with insurance penetration expected to rise from 3.8% currently to 4.5% by 2034.
Closing the protection gap
India is inherently vulnerable to numerous catastrophic natural disasters. Its varied topography, which includes mountains, plains, and coastlines, exposes each region to specific natural catastrophe risks.
The average annual economic loss over the last decade (2013‒22) was $8 billion (inflation-adjusted), 125% higher than the average of the previous decade ($3.8 billion, 2003‒12), accorning to Swiss Re Institute.
Since the turn of the century, there have been a number of large-loss flood events including in Mumbai in 2005, Uttarakhand (Kedarnath) in 2013, Jammu and Kashmir in 2014, Chennai in 2015, Kerala in 2018, and northern India including New Delhi in 2023. Single flood events that cause economic losses of more than $1 billion have become more regular. There were 11 such events in 2013‒22 compared with six in 2003‒12.
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Tropical cyclones also strike India, typically in West Bengal, Odisha, Andhra Pradesh and Tamil Nadu on the east coast, and Gujarat on the west coast. Recent cyclones such as Hudhud (2014), Vardah (2016), Fani (2019), Tauktae (2021) and Yaas (2021) caused economic losses, adjusted for inflation, of more than $2 billion, according to Swiss Re Institute. With low insurance penetration, the large economic losses inflicted by natural catastrophes in India are mostly uninsured.
This significant disparity between economic losses and insured losses highlights a critical gap in coverage that presents a considerable opportunity for growth in the insurance industry. This presents an opportune moment for both insurers and reinsurers to collaborate on developing tailored coverage options that can mitigate risks and protect economic interests.
To ensure economic resilience, it is crucial to reduce the gap between incurred economic losses and insured losses; a concept often referred to as “closing the protection gap”. Reinsurance has a key part to play in providing the risk capacity to enable this.
Support for innovation and new products
Reinsurers provide capital and expertise to support the development of innovative insurance products, such as cyber insurance, parametric insurance, and weather-related products. The backing of reinsurance capital allows insurers to innovate and introduce new products that may have unpredictable risks.
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For example, Nagaland’s Disaster Risk Transfer Parametric Insurance Solution (DRTPS) is a multi-year insurance plan in partnership with reinsures that provides financial protection to the state’s population and critical infrastructure in the event of a disaster. The plan is based on data from ground weather stations and is designed to help the state respond more quickly and efficiently to disasters. Reinsurers also offer data modelling and risk analysis, further enhancing the ability of insurers to assess and price new types of risk.
Microinsurance schemes, designed for low-income households, are essential to bridging the protection gap in rural India. Reinsurers contribute by providing the necessary risk management expertise and financial backing, ensuring the sustainability of these schemes.
Enhancing insurance capacity and penetration
Reinsurance enables primary insurers to underwrite larger and more diverse risks by providing a financial safety net. This capacity is crucial in a country like India, where insurance penetration is about 3.7% of GDP, compared to the global average of 6.31%. By sharing risks with reinsurers, insurance companies can offer more comprehensive and affordable products, thereby extending coverage to previously underserved populations.
Enabling business continuity
The presence of reinsurance capital ensures that insurers can maintain business continuity during times of high claims activity. Without reinsurance, insurers could face liquidity issues and may need to reduce their underwriting activity, limiting their ability to offer coverage to clients. During events such as natural disasters, when claims might surge, reinsurance helps stabilise insurers’ financial standing, allowing them to continue operating and fulfilling their obligations to policyholders.
Improving financial stability and resilience
Reinsurance helps primary insurers manage large and catastrophic risks by spreading them out. This enhances the financial stability of insurers, allowing them to offer more comprehensive coverage to policyholders.
Transferring risks to the (re)insurance market has macroeconomic value and helps facilitate speedy recovery from major catastrophic events. Consequently, the insurance sector is regarded as a key player in enhancing resilience in disaster risk reduction. Reinsurance capital empowers the insurance sector to effectively fulfill this role.
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The author is chief technical officer, Bajaj Allianz General Insurance.
