Question

how insurance policy help people affected in Chennai floods

Answer 1

As the flood waters recede, the cost of the disaster is beginning to be quantified. According to Aon Benfield's catastrophe modelling unit, just 10% of the forecast GBP 3bn economic loss is likely to be insured, and therefore the impact on reinsurance providers is anticipated to be minimal.

Insurance penetration in India is relatively low; the gulf between the anticipated financial cost of the disaster (GBP 3bn) and the potential insurance exposure (GBP 300m), highlights just how much of an issue the "protection gap" is for the Indian insurance market. Insurance penetration had been increasing in India since 2000, but has consistently declined over recent years. Swiss Re reported (in June 2015) that Indian insurance penetration was at a 10 year low. The insurance sector has not been able to keep pace with the growth in GDP; distribution channels are challenging, as are rising costs and delays in the progress of reform in the sector.

Motor:

A significant proportion of the insured losses will arise in the motor sector. The Electronic Control Units in submerged cars are likely to become damaged as a result of the flood water and with high end cars, the cost of these ECUs can be very high. Catastrophe reinsurance cover should reduce the impact of these losses for some domestic insurers. Certain motor losses that relate to engine damage due to hydrostatic lock will not be covered for many insureds since they are excluded under the standard motor insurance terms (the standard terms are mandatory for Indian insurers), and ordinarily, policyholders do not obtain appropriate add-on covers to protect themselves from such consequential losses.

Property:

A large number of homes and commercial premises have been damaged. The extent of property losses will depend on insurance penetration. Indian government owned properties are not insured, and it is likely that only a very small number of the domestic homes that have been damaged or destroyed are protected by insurance cover. Chennai has an economic base anchored by the automobile, software services, medical tourism, hardware manufacturing and financial services. Other important industries include petrochemicals, textiles and apparels. Many property damage claims have been notified to insurers but an estimation of the quantum of losses is proving to be difficult at the moment.

Business Interruption:

Business interruption policies may also be triggered, with reports of production being halted by a number of automotive manufacturers and with the impact of the property damage on supply chains. However, in circumstances where production was voluntarily halted as a precautionary measure (as was seen being done frequently during the floods) loss of profit will not usually be picked up by the business interruption covers availed by the manufacturers albeit there are some specialist insurers who offer such cover.

As with the Thai floods of 2011, it is likely that the question of cover for the financial impact of "wide area" damage may come under scrutiny. For English law policies on the market standard wording, the Orient Express decision remains good law and would greatly limit the cover available by deducting from the general business interruption claim the losses that would have been suffered in any event due to the impact of the floods on the region and its economy. Cover then has to be found in extensions such as Loss of Attraction or Denial of Access which typically carry lower sub-limits.

The floods will once again highlight the potentially global impact of such events in causing losses to businesses located elsewhere in the world, but who are dependent for their IT, other services or parts supplies on the affected businesses in Chennai. Cover is frequently provided for such losses by the contingent business interruption extensions in the standard policy. However, the precise scope of cover varies and is dependent on the insurer's wording. Issues of policy construction frequently arise in these situations as to the definition of a supplier (where they are not named in the policy) and whether it applies only to "direct" contractual suppliers. Losses due to the interruption of incoming data supplies are frequently excluded but less clear would be the position where an insured business has outsourced its IT operations to a Chennai-based provider.

Cover under customers and suppliers extensions would typically only apply if the premises of the customer/supplier are damaged (or access denied). So, for insureds unable to obtain supplies from a supplier whose premises were unaffected but whose own inwards supplies were disrupted due to transport difficulties, there is unlikely to be cover unless a bespoke wording applies.