The monsoon between a curse and a blessing

The significant increase in extreme monsoon rainfalls, a burgeoning of insured values, and fiercer price competition are major challenges for the insurance industry in India. The market is currently going through a complex process of liberalisation and adjustment.
The monsoon is as much a part of India as the country’s extensive dry seasons. Producing about 80–90% of the country’s annual precipitation, the summer monsoon (June–September) is a source of life to India, regulating, as it does, the gigantic country’s water balance. It is particularly crucial for the agricultural sector, which accounts for about a fifth of India’s gross domestic product and provides work for around two-thirds of the population. But the monsoon itself has changed. The frequency and intensity of extreme rainfall have both increased considerably, whilst exceptional rainfall levels have given rise to serious floods and ensuing damage in recent years. In 2005, the highest level of precipitation ever measured on a single day in India was recorded in Mumbai. In 2007, the effects of the summer monsoon were extremely intense for the third year in succession.
The annual overall loss due to flood in the years 2005– 2007 averaged roughly US$ 4bn, three to four times higher than the average for the period 1980–2004. Escalating concentrations of values in exposed regions like Mumbai combined with growing insurance awareness caused insured losses to soar during this period. Is this latest development merely an outlier or the herald of a long-term change in monsoon activity?
Climate change as the cause
Scientific studies show that monsoon activity in central India has changed significantly (Goswami et al. 2006). The daily variability of monsoon rainfall, i.e. the range between severe and less severe daily rainfall events, has increased markedly in the last 50 years. In central India, the number of intense precipitation events per day (at least 100 mm/day) has increased by about a third since 1950. The figure is even more dramatic in the case of extreme precipitation events, involving levels of at least 150 mm/day. It has roughly doubled since 1950 – a highly significant increase in scientific terms. At the same time, there were considerably fewer instances of moderate precipitation events in the observation period. Although these opposing trends mean that average rainfall has not changed, this is not good news. On the contrary: whilst the moderate monsoon is important for India’s water balance, especially for the agricultural sector and the supply of drinking water, intense and extreme rainfall have a major bearing on losses. What is more, the majority of models quoted by the Intergovernmental Panel on Climate Change in its report assume that the total rainfall depths of the summer monsoon will increase in future. Even if there are large deviations between the individual scenario calculations, there is no doubt about the outcome: Indian summer monsoons are very likely to become more extreme.
And this is due to global warming. Sea surface temperatures in the tropical Indian Ocean, for instance, have risen by about 0.5°C over the last 50 years. This results in more moisture reaching India with the monsoon.
It is a risk of change that is difficult to quantify and the Indian insurance industry must give greater attention to devising appropriate solutions – particularly as the values to be insured are rapidly increasing.
Losses increase – Premiums come under pressure
In India, the natural perils of windstorm and flood (STIF) are automatically included in any property insurance policy. Weather risks, particularly monsoon rainfall, have always constituted a major threat. The process of global warming has made it more and more difficult to forecast the beginning and magnitude of annual monsoon rainfall. Between 1980 and 2007, weather disasters (floods, storms, droughts) caused overall losses amounting to US$ 53bn (2007 values). The main peril is flood, which accounted for about 77% of the overall losses and 66% of the insured losses over the said period.
The summer floods in 2005 (Mumbai Floods) exhausted nearly all the market players’ cat XL programmes for the first time ever. Due to the agreed net retentions, some of them had large losses that were not covered. There is already a broad consensus in the market that the rates, especially for flood risks, have to be adjusted substantially. Some insurers are considering the possibility of quoting separate premium rates, but this is not to be expected in the short term due to the shortage of claims statistics and especially to the fact that as of 1 January 2008 pricing controls have been removed in all lines of property insurance except motor third-party liability.
Market and market players in a learning process
For the insurance industry, the question is how the Indian insurance market will develop in the medium to long term. If there are no major loss events with large insured losses, pricing pressure will certainly be maintained for some time. Moreover, companies have in the past compensated underwriting losses with high returns on India’s booming stock exchange. Reinsurance capacity is generally available in good measure.
At present, however, India is going through a process of learning and adjustment. The market has yet to encounter a phase with a scarcity of reinsurance capacity that necessitates risk-based pricing. Generally speaking, the private insurance industry should in the long term offer coverage concepts, such as a pool solution with compulsory insurance for natural hazards. These require both technical know-how and financial resources, however. International reinsurers could provide both, but the scope for efficient risk transfer in India is limited at present. Reinsurance is mainly provided by the General Insurance Corporation of India (GIC Re), to which non-life insurers must currently cede 15% of their cessions.
Low market penetration – High growth potential
The socio-economic transformation of India presents its insurance industry with great challenges. Forecasts suggest that the country’s insurance market will increase to some €100bn, five times its current volume, over the next ten years. This growth will be driven above all by rising demand from India’s middle class, currently numbering some 300 million people, and the improvement and expansion of the infrastructure.
Freedom of establishment for foreign insurers is limited at present to joint ventures with a maximum foreign capital share of 26%. The government is currently examining the possibility of increasing this share to 49%. At present, 17 property insurance companies and 17 life insurers are licensed to do business.
These figures vividly illustrate how much the insurance industry has already profited in recent years from the opening of India’s market as well as from the country’s high rate of economic growth. Between 2001 and 2006, the annual increase in premiums averaged roughly 24% in life and 11% in non-life. In an international comparison based on total population, market penetration is still comparatively low in what is the second most heavily populated country in the world. With an average premium volume as a percentage of GDP, market penetration is about 0.6% (non-life) and 4% (life). In the non-life sector, it is estimated that 90% of the Indian population have no insurance protection whatsoever. In terms of absolute premium volume, however, the country already ranks fi fth in Asia after Japan, South Korea, China, and Taiwan and fifteenth in the world (2006). And experts agree that the speed of expansion will continue to be high in the years to come.
Positioning ourselves selectively as a reinsurer
Munich Re has 50 years of experience on the Indian insurance market; it knows the market players and local customs and practice. We opened an office in Kolkata in 2000 and a representative office in Mumbai the following year. We enjoy the confidence of the Indian insurance market and, on the strength of our long-standing business relations, are recognised as a reliable reinsurance partner.
In the current market phase, we are looking beyond our traditional reinsurance business, positioning ourselves as a global reinsurer particularly in niche markets and in sectors where quite specific, individual solutions are required. For example, we are stepping up our involvement in renewable energy projects. With a view to offering attractive insurance solutions in rapidly growing emerging markets, we developed a new product last year: the Kyoto Multi Risk Policy.
We also make available our risk knowledge and financial strength in connection with large and very large risks – a segment that is continuously gaining in importance in the dynamically growing economy of India. We not only provide our capacity but also make an important contribution to the development of risk awareness.
We intend to do everything in our power to support India in the reinsurance sector. To ensure the stability of its strongly expanding insurance market, deregulation must be extended from India’s primary insurance market to include international reinsurance business as well. We intend to open a reinsurance branch as soon as the legal framework permits.

Source: Munich Re