With nearly 59% of the country’s landmass at varying degrees of risk, the real question is not if a major quake will strike, but when. While this is a region-specific, once-in-150-year event, should it occur, we would need financing for the four ‘R’s of rescue, relief, reconstruction and rehabilitation. India has a robust disaster risk financing mechanism, but needs to focus on insurance and ring-fencing in preparation for a significant seismic event.
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Loss and damage: Earthquakes are sudden and each is unique, leaving little time for preparedness and response. Homes collapse, people die, businesses shut down and infrastructure crumbles. The burden often falls on individuals and governments and without a structured earthquake insurance system, recovery is painfully slow, pushing families into years of financial distress.
The 2001 Bhuj earthquake resulted in losses exceeding ₹10,000 crore. India’s quake insurance penetration remains low largely due to lack of awareness, a weak push from insurers and an element of fatalism among people, as also the conception that the government will provide sufficient relief. However, global experience shows that public finances are often inadequate, covering only a fraction of actual economic losses.
Global models: Several countries have earthquake insurance programmes that balance affordability, accessibility and sustainability. Japan, for instance, has a highly developed quake insurance market supported by the government through a reinsurance mechanism, where private insurers provide primary coverage while the government acts as a reinsurer to ensure financial stability for major payouts.
Similarly, Turkey’s Compulsory Earthquake Insurance Scheme mandates coverage for all residential buildings and has achieved penetration of over 60%. After the 2023 Turkey-Syria quake, it disbursed over $340 million to affected households, demonstrating the effectiveness of compulsory insurance in facilitating swift reconstruction efforts.
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Mexico has pioneered the use of catastrophe bonds (or ‘cat bonds’) to hedge this risk. This financial instrument lets the government transfer risk to global investors and ensures rapid liquidity in the aftermath of a major disaster.
Another noteworthy model is New Zealand’s Earthquake Commission (EQC), which played a critical role in financing a recovery after the 2011 Christchurch quake that caused $40 billion in estimated losses. The EQC operates a government-backed insurance scheme funded by levies on home insurance policies, enabling a quick financial response.
Innovative solutions: One approach to retail insurance is the use of parametric coverage, which, unlike traditional indemnity-based covers, triggers payouts based on pre-defined parameters such as a quake’s magnitude and location. This ensures rapid disbursement of funds, minimizing administrative delays in disaster response.
Another potential solution is the creation of a government-backed earthquake insurance risk pool, similar to Japan’s reinsurance model, which could ensure affordability while encouraging private sector participation. A risk pool is a corpus of funds reserved—mostly with a reinsurance company—to cover ‘cat risk’ beyond the balance sheet of insurers.
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Some insurance experts are of the view that expressed demand is what spurs the creation of a risk pool.
For example, the need for a ‘terror pool’ arose in the US after the 1993 bombings. Before that, terror risk was manageable for insurer balance sheets, but as it grew more expensive, companies unbundled terror risk and converted it into an add-on product. To cover this heightened risk, a terror risk pool was created in India by GIC Re. Similarly, marine and nuclear risk pools are also operated by GIC Re.
Another means of insuring against disaster risk is the issuance of ‘nat cat bonds,’ which spreads the risk to global financial markets, albeit at a higher cost. It is a rare instrument, wherein the bond’s principal remains at risk. Yet, such bonds are an attractive investment for financial houses, as the disaster risk curve is not aligned with the financial-market risk curve, allowing both risks to be hedged.
The World Bank and several global entities offer such bonds, the total market for which is placed at $50 billion outstanding. India’s International Financial Services Centre at Gift City could also consider issuing national catastrophe bonds, thereby making India a hub for the Insurance Linked Securities (ILS) market.
With nearly 59% of the country’s landmass at varying degrees of risk, the real question is not if a major quake will strike, but when.
Incentivize earthquake insurance: While home insurance should be mandatory, it is also controversial. We must therefore proceed with care. Some countries have taken the mandatory route for home insurance in highly vulnerable zones through legislation.
An alternative is to encourage compliance and ensure affordability through tax benefits or premium subsidies. Additionally, banks and housing finance companies could consider making property loan disbursal incumbent on insurance cover for the entire value of a mortgage property.
Above all, it is for the insurance industry to expand the country’s property insurance market with innovative products and attractive schemes.
The author is senior consultant (finance), National Disaster Management Authority (NDMA).
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