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Tuesday, August 14, 2012

Is Flood cover free or ?!! - Economic Times article on Flood Insurance

For Insurers, Insuring Public, Surveyors, Loss assessors and other associated with Insurance field, the following article in Economic Times of date sure makes an interesting read…

The article is reproduced in its entirety – (you can also click here to read the original post  ):  Economic Times - Flood cover

*** Corporates will have to shell out 15% more for fire and engineering insurance as non-life insurance companies plan to include flood risk in the policy after having burnt their fingers in the recent catastrophes in Thailand, Japan and New Zealand.

Premium  has gone up from 0.15% to 0.25% per thousand of the sum assured. "Weather pattern is changing everyday. Flood exposure is going up," said KG Krishnamoorthy Rao, managing director and CEO, Future Generali General Insurance. GIC posted a maiden loss of Rs 2,469 crore in 2011-12 due to unprecedented natural catastrophes in Thailand, Japan, New Zealand and Australia.

Global reinsurance firm Swiss Re had termed 2011 as the costliest year with insured natural catastrophic losses exceeding $110 billion and 60% of it arising from the Asia Pacific region. Reinsurers have increased rates during the current financial year, and the companies are passing on the additional cost to customers.

Earlier, flood cover was free for corporates. Later, it was made optional for an additional premium. Now, insurers have defined specific premium on it. Standard fire policy covers risk from lightning, riot and others while flood insurance covers property against loss from flooding.

"Earlier, premium on flood perils were given for free. Companies are now defining flood cover and they have created tariff rates of 0.25% on the policy," said a senior executive of a general insurance company. The regulator has asked the industry to come out with an agreement on flood risk to improve rating and solvency.

The regulator has said risk should be priced appropriately. "Any nat cat (natural calamity) event will have a huge impact on the industry," said a senior Irda official. "Demand for setting up reserves for nat cat is being considered actively."

General Insurance Corporation had plans to set up a pool to reinsure risks arising out of natural calamities in Asia and Africa. GIC is managing the natural catastrophes pool, which will have participation from around 200 members from Asia and Africa.****

It appears that this article is flawed in fundamental aspects.   Until a few years back,there was the Tariff which prescribed the rates - now it is virtual mayhem - an age of discounts. Suddenly, the premium rates have come down drastically and the market scenario is charging premium of almost 10% of whatever would have been charged when the Tariff was in existence.  So, if going by the article above, if Insurers were to hike their premium by XX % incorporating a decent enough rate for Flood related risks, it makes sense, otherwise - whatever be the International catastrophe scenario, rates will continue to be at the nadir.  

Presently, in India, we have the ‘Standard Fire & Special Perils Policy” .. which provides indemnity for named perils and the perils named in the Policy are
1.        Fire
2.        Lightning
3.        Explosion / Implosion
4.        Aircraft Damage
5.        Riot, Strike & Malicious damage
6.        Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation
7.        Impact damage
8.        Subsidence and Landslide including rockslide
9.        bursting and/or overflowing of water tanks, apparatus and pipes
10.    missile testing opeations
11.    leakage from automatic sprinkler installations
12.    Bush fire

This makes it amply clear that  ‘wind and water perils’ – elaborately described as ‘Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation’ are part of Insurance coverage, without payment of any additional premium.  The premium paid for the base coverage includes premium for the peril and hence there is no additional premium envisaged as written in the article in Economic Times. 

The Policy excludes Earthquake and the following perils can be covered on payment of additional premium  :  deterioration of stocks in cold storage due to power failure following damage due to an insured peril; forest fire; impact damage by Insured’s own rail/r0ad vehicles; Spontaneous combustion; Earthquake (Fire & Shock)

The Economic Times articles would have found relevance  when the Fire Tariff effective 1st April 1987 was in vogue.  At that time, there were 3 types of Policy coverage provided :  Fire Policy A;  Fire Policy B and  Fire Policy C.  In those days, A & B were at small sector, dwellings, shops and non-industrial risks.  Fire Policy ‘C’ was given to Manufacturing risks, Industries, Godowns and the like. 

At that time also Fire Policy 'A' provided coverage for ‘Flood’ – in as much as there were 9 specified perils which included – ‘STFI’ as also ‘Earthquake’.

Fire Policy B & C – provided coverage against only 6 perils viz., Fire; Lightning; Explosion/Implosion; Riot, strike and Malicious damage; Impact damage by rail/road vehicle or animals; aircraft damage.

While the Fire Policy B could not be extended any further, Fire Policy C offered extended coverage [of course on payment of additional premium] for:  Storm, Cyclone, Typhoon, tempest, hurricane, Tornado, Flood & Inundation; Subsidence and landslide; and Earthquake Fire & Shock.

Thus it is clear that ‘ insurers have defined specific premium on flood coverage and having included the same now’ is flawed and not correct – in Indian context.

For somebody looking beyond the obvious, ‘the coverage’ for “Storm, cyclone, typhoon, tempest, hurricane, tornado, flood and inundation” encompasses – wind peril i.e., damage caused by wind at specified speeds [storm, cyclone, typhoon, tempest, hurricane, tornade] and another set of water perils ‘flood and inundation’ – are worded in the same peril.  The absence of definition, especially for ‘flood and inundation’ and the varied interpretation makes it too confusing while adjudicating a claim. 

Now there is good and bad news for Insurers.   First the good news is that there is now standard definition of ‘flood’ as stated in Insurance policies – purported to mean ‘the covering of normally dry land by water that has escaped or been released from the normal confines of...a lake, a river, a creek or another natural watercourse a reservoir, a canal or dam.  The bad news is – it is not in India but in Australia as formulated in the The Insurance Contracts Amendment Regulation 2012  which would apply after a transition period.  More on the definition as made in Australian regulation in a separate post sooner…..

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With regards – S. Sampathkumar
14th August 2012.


  1. Ya i went through it in the morning.The second line of the article says that the 'companies will include flood risk in the policy' , i was confused for a second and was wondering..Flood is already covered under STFI perils under fire & allied perils policy.But i was not known of the rating that add on cover for flood is given by paying the additional premium so as earthquake cover..I think rather than charging additional premium,they should increase the base premium component depending on the risk profile of the insured.

  2. Sampath is perfectly right as the Standard Fire & Specal Perils policy available in India already covers flood loss.The error if any is essentially bexcause very few media persons are specially qualified to write on general insurance matters and the race to ne the first to brek a story leads to such wrong reporting.
    If the insurers are planning to increase tariif, it is fine and perhaps a sensible thing as in their desire to ganer more business in a hurry & repent at leisure, the insurers did indulge in too much of competition. Increase in fire policy premium is good for the health of insurers.
    Col Jairath(Retd)

  3. the confusion arisen due to the Newspaper not mentioning the location where this change is happening. I would be more interested to know the definition changes in 'flood'.

  4. Most of the time, the news papers enter into more technical issues like the subject articles. As usual Shri.Sampath had clarified adequately.