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Hit by growing disaster losses, insurers set limits on coverage

Source: Thomson Reuters Foundation - Fri, 1 Jun 2012 14:21 GMT
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By Syful Islam

DHAKA, Bangladesh (AlertNet) – The growing number of natural disasters linked to climate change has pushed global and local insurers to put a cap on their liability, leaving policy holders vulnerable to financial losses in the event they suffer major destruction.

Recent catastrophes such as flooding in Thailand and Australia, earthquakes in New Zealand and the tsunami in Japan have caused enormous losses to global insurers and reinsurers.

In response, reinsurers announced recently that they will limit their future liability in any disasters in Asia to 1.5 billion Bangladeshi taka (about $18 million) per event for each insured party.

Following suit, Sadharan Bima Corporation (SBC), Bangladesh’s lone state-owned reinsurer, imposed the same condition for renewing reinsurance treaties with local insurance companies for the fiscal year 2012-13. SBC underwrites almost 80 percent of the country’s billions of dollars of insurance coverage. The cap came into effect in April.

According to the assistant general manager of SBC, Jakir Hossain, the country’s insurance companies provide coverage of some 60 billion taka ($731 million) for natural disasters such as earthquakes, floods and cyclones. The increasing frequency of cyclones and flooding in Bangladesh is believed by experts to be a consequence of climate change.

Bangladesh’s insurance companies worry that the reinsurers’ decision has put them in peril, since a major disaster that causes large-scale destruction could leave them with huge financial losses.

“The event limit of protection given by the SBC is 100 to 150 percent of the respective treaty capacity (i.e. up to 1.5 billion taka), though the exposure of the individual company against catastrophe perils is in billions of taka,” said Nasir A. Chowdhury, chief executive officer of Green Delta Insurance Company Ltd., which is based in Dhaka,

“If any such event, especially an earthquake, occurs in Bangladesh, the liability of each insurance company shall be billions of taka, which they may not be able to pay because of limited reinsurance protection by SBC and other reinsurers,” Chowdhury said.

WORSENING DISASTERS

Catastrophic flooding is a commonplace occurrence in Bangladesh. Flooding occurs during the monsoon season every year, and in the past quarter-century the country was particularly devastated by flooding in 1987, 1988, 1998 and 2004.

The 1988 flood affected more than 75 percent of Bangladesh, and in 2004 two-thirds of the country went underwater, causing widespread destruction to property and infrastructure valued at nearly $7 billion. 

April of this year brought a tsunami watch to countries bordering the Indian Ocean, including Bangladesh. Heavy rains and thunderstorms have already struck the country as summer begins, claiming at least 20 lives in April, and cyclone warnings have been posted several times.

 “The intensity of cyclonic wind in the Bay of Bengal has increased significantly in recent years, which we noticed in cyclones like Sidr and Aila, both of which caused a lot of damage,” said Ainun Nishat, vice chancellor of BRAC University in Dhaka.

“The frequency of disastrous events is likely to rise further,” he said.

SBC’s Jakir Hossain conceded that major destructive events are likely to hit insurance companies with huge losses.

“But we can’t go beyond the limit as that will go against our capacity. The protection limit is introduced globally,” Hossain said.

Saifuddin Ahmed Chowdhury, additional managing director of Bangladesh General Insurance Company Ltd, maintained that for events like floods and cyclones, the agreed limit of coverage by the reinsurance companies would be adequate.

“But for a massive earthquake event the coverage agreed by the reinsurer is very much inadequate which has raised the vulnerability of both the insurance companies and insured.”

The country has experienced more than 30 earthquakes of 1.5 to 6.0 magnitude on the Richter scale in the past year, according to Syed Humayun Akhter, a seismologist and supervisor of Dhaka University’s Earth Observatory. Akhter is concerned that a major earthquake may be imminent in Bangladesh.

NO ABILITY TO GET LOANS

Meanwhile, businesses that have taken out insurance against natural disasters are concerned the lack of insurance will cause problems even in day-to-day business.

Abdul Awal Mintoo, chief executive officer of Multimode Group, whose businesses include textiles, shipping, seeds, software and banking, said that if the insurance companies fail to give risk coverage to the insured, companies may not be able to access loans.

 “Unless the insurance companies can provide risk coverage to our establishments, no banks will lend to us and our business will face trouble,” he said.

Against this backdrop, the country’s insurance companies are now planning to create a pool of disaster insurance funding in order to provide full coverage to their policy holders.

“We have asked all our members to inform us of their liability in case of flooding, cyclone or earthquake,” said Molla Nurul Islam, secretary-general of the Bangladesh Insurance Association.

Islam said the association would work to find ways to cover the liabilities of its members in the event of a disaster.

“We are legally bound to give full insurance coverage to the insured,” he said.

Syful Islam is a journalist with the Financial Express newspaper in Bangladesh. He can be reached at: youths1990@yahoo.com.

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