A working group of insurance sector regulator IRDAI has suggested setting up of a pandemic risk pool with a Rs 75,000 crore backstop guarantee from the government in the initial stages, with a view to help MSME workers and migrant labourers facing loss of income.
The actual pool size will depend on the risk covered and its estimated potential losses, said the report by the Insurance Regulatory and Development Authority of India (Irdai) group.
The group has recommended formation of the ''Indian Pandemic Risk Pool'' to address losses and unsettlement caused to the informal and low income sectors of the society and serve as a medium of providing relief to these sectors by the government in case of any such pandemic or epidemic events in future.
So far, experts say that business interruption losses caused by the COVID-19 pandemic will be huge and unprecedented and it is hardly an estimate which can be the basis of formation of insurance pools and backstops.
During the first phase of pandemic pool implementation, business interruption focusing on wages of MSME sector and migrant workers were given priority, the report said.
With an assumption of 4 crore employees and workers getting benefited and pay-out is limited to 3 months maximum, then the total pay-out will be Rs 78,000 crore, the report said.
"As per recent Indian Nuclear Insurance Pool (INIP), it is recommended to start with pandemic pool of Rs 5,000 crore. The remaining amount of Rs 75,000 crore will be required as backstop guarantee from the Government of India," it said.
During the subsequent phases, the pandemic coverage will be extended to other lines of business, then the exposure will go up and the government backstop requirement will peak up to Rs 1,25,000 crore and then it will start gradually reducing, it said.
Approximately 20 to 25 years will be required to grow the pool size to make it self-sufficient, said the report of the panel headed by Irdai Executive Director Suresh Mathur.
As per the report, the government backstop is understood to trigger only when pandemic trigger strikes and the pool payout is higher than the premiums collected, capacity offered by insurers/reinsurers, capacity offered by other bonds and surplus of the prior years.
"The backstop would thus fill the difference between the total payout and other funding sources of the pool, if the other funding sources are lower than the total payout," it said.
In July, Irdai had set up the working group to examine the possibility of setting up a ''Pandemic Risk Pool'' to deal with the risks associated with disruption in economic activity following an outbreak of coronavirus-like health emergencies.
The report further said the pool should provide coverage in a phased manner.
As the micro, small and medium enterprises and the unorganised sector are the worst affected segments of society during the current COVID-19 pandemic in India, first phase of the pool should cover income losses due to non-damage business interruption resulting from a future pandemic event and subsequent lockdown, the report said.
"Pandemic losses are covered under presently available health insurance products, hence the coverage for losses in health segment caused due to a pandemic event, beyond a threshold, may be covered under the Pool in the second phase," it said.
The coverage under the pool may be expanded to life insurance segment also in the later phases, it added.
The report noted the quantum of loss due to an epidemic or pandemic risk event is huge and hence is beyond the capacity of public sector companies or private companies or government alone.
Hence, a risk pooling mechanism with public-private-government participation would be an appropriate resolution to address similar concern in future, it said.
Indian Reinsurer, GIC Re, which has experience of managing the Indian market terrorism risk pool and Indian nuclear pool in India, should be an apt administrator for the proposed pandemic pool, it added.