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INDEX

Particulars Page no.

Introduction 1

Sector with maximum claims 2

How to settle claims 3

Safety measures 4

Conclusion 5

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INTRODUCTION

The 2015 South Indian floods resulted from heavy rainfall generated by the annual northeastmonsoon in November  – December 2015. They affected the Coromandel Coast region of the

South Indian states of  Tamil Nadu and Andhra Pradesh, and the union territory of

Puducherry, with Tamil Nadu and the city of  Chennai particularly hard-hit. More than 500

 people were killed and over 18 lakh (1.8 million) people were displaced. With estimates of

damages and losses ranging from ₹50000 crore (US$7 billion) to ₹100000 crore

(US$15 billion), the floods were the costliest to have occurred in 2015, and were among the

costliest natural disasters of the year. The flooding has been attributed to the El Niño

 phenomenon. 

Some of the known insurance losses are those to automobiles, small scale industries, some

claims from submerged small aircraft and flooding in a couple of IT companies and in an

automobile company. Although insurers have not yet become fully functional in Chennai,

going by the intensity they say that the second phase of flooding would generate more than

the first phase earlier this month which resulted in claims close to Rs 500 crore.

.

https://en.wikipedia.org/wiki/Northeast_monsoonhttps://en.wikipedia.org/wiki/Northeast_monsoonhttps://en.wikipedia.org/wiki/Coromandel_Coasthttps://en.wikipedia.org/wiki/South_Indiahttps://en.wikipedia.org/wiki/Tamil_Naduhttps://en.wikipedia.org/wiki/Andhra_Pradeshhttps://en.wikipedia.org/wiki/Puducherryhttps://en.wikipedia.org/wiki/Chennaihttps://en.wikipedia.org/wiki/Lakhhttps://en.wikipedia.org/wiki/Indian_rupeehttps://en.wikipedia.org/wiki/Indian_rupeehttps://en.wikipedia.org/wiki/Crorehttps://en.wikipedia.org/wiki/Indian_rupeehttps://en.wikipedia.org/wiki/Indian_rupeehttps://en.wikipedia.org/wiki/Crorehttps://en.wikipedia.org/wiki/El_Ninohttps://en.wikipedia.org/wiki/El_Ninohttps://en.wikipedia.org/wiki/El_Ninohttps://en.wikipedia.org/wiki/El_Ninohttps://en.wikipedia.org/wiki/Crorehttps://en.wikipedia.org/wiki/Indian_rupeehttps://en.wikipedia.org/wiki/Crorehttps://en.wikipedia.org/wiki/Indian_rupeehttps://en.wikipedia.org/wiki/Lakhhttps://en.wikipedia.org/wiki/Chennaihttps://en.wikipedia.org/wiki/Puducherryhttps://en.wikipedia.org/wiki/Andhra_Pradeshhttps://en.wikipedia.org/wiki/Tamil_Naduhttps://en.wikipedia.org/wiki/South_Indiahttps://en.wikipedia.org/wiki/Coromandel_Coasthttps://en.wikipedia.org/wiki/Northeast_monsoonhttps://en.wikipedia.org/wiki/Northeast_monsoon

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QUESTION 1

In this situation, from which sector do you think maximum number of claims arise

from? (Example: property, auto, life etc.)

ANSWER:

The maximum claims in this situation could arise from either auto insurance claims or from

 property claims.

AUTO INSURANCE

During the floods, water rendered many peoples vehicles useless. This happened to such an

extent that hundreds of people sold their cars worth tens of lakhs for as cheap as two-four

lakhs. The water damaged vehicles to such an extent that they were way beyond repair. The

only people interested in buying these cars are spare part dealers.  

Companies have received claims for auto insurance running into hundreds of crores. The

number of claims is more in this sector as market penetration of insurance policies is more in

this sector.

PROPERTY INSURANCE

 Numerous commercial establishments were destroyed during the floods. Severely affected

amongst them were MSME’s. Complete establishments and plants got washed away in the

floods. Insurance policies in these cases also cover the loss in revenue suffered.

Coming to the market penetration of these loans in the affected area, it is not very high because commercial establishments mainly fall under the MSME category. Insurance cover

in this industry is not very prevalent, but the claims still run into thousands of crores, because

the companies also have to cover for the loss in revenue.

Hence, our analysis says that the maximum number of claims will arise from the

automobile sector but the amount of claims (value) will be higher from the property

sector.

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QUESTION 2 

In such a situation, how would the insurance companies arrange for liquid funds of Rs.

1000 crores within a very short period of time?

ANSWER:

Insurance companies, unlike commercial banks are not bound by any Reserve Bank of India

(RBI) guidelines to maintain a minimum amount of cash or liquid assets with them. The only

regulations from Insurance Regulatory and Development Authority (IRDA) are that the

company should have a minimum paid up capital of Rs. 100 crores.

Other than that, all insurance companies are expected to maintain a solvency margin, which

means that assets should be more than liabilities at all times. Also, they also have to make an

“unexpired risk reserve” every year. For fire and cargo insurance business, 50% of net

 premium income is to be made as risk reserve and 100% of net premium income is to be

made for marine business.

To cover for the claims incurred during the floods, the company will first utilise the so

 prepared reserve and then go on further as explained below. It is necessary for all the

companies to settle all the legit claims if they do not want legal proceedings against them.

Dilute reserves to the extent of cash andcash equivalents available

Raise money through liquid assets (tradereceivables, short term bonds, etc.)

Expire your loan taking capacity

Sell of minority stake in subsidiaries

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QUESTION 3 

The year is 2020 and as an insurance company, come up with a strategy to deal with a

situation similar to that which occurred in Chennai, 2015 wherein the company received

a lot of insurance claims.

ANSWER:

 No one has control over natural happenings, but companies should plan from earlier to make

sure they have enough reserves to face such a situation. The following are some point that

each and every insurance company should follow:

  Make extra unexpired risk reserves, more than the minimum requirement 

Each company should try to make extra reserves out of their net premium profits every year,

more than the minimum requirement set by the regulating authorities. This will help them a

lot in case of adverse situations like the Chennai Floods.

  Long term reserves, to cover for extra-ordinary events 

As a safeguard against extra-ordinary events, which can neither be predicted nor prevented,

each company should try to create long term reserves against extra profits every year so that a

situation like that in Chennai arises, they are ready to face the same.

  Maintain a minimum level of cash and cash equivalents and liquid asset 

Even though there is no regulatory compulsion in this regard, each and every company

should set a minimum level of cash and cash equivalents and liquid asset that they will

maintain no matter what, based on the type of insurance service they are providing. This will

help them in repaying their claims easily without any complications what so ever, if ever a

situation of excess claims arises.

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CONCLUSION

The situation that occurred in Chennai and the complications that it bought in for all the

companies shows that how unpreparedness they were to face such a situation.

Hence, it would be ideal for all companied to try to adapt the safety measures listed above so

that they ca minimize their exposure to risk to as high an extent as possible.