Wildfires in Los Angeles County have very recently devastated hundreds of homes, cars and lives, highlighting the vital importance of insurance in disaster prevention and recovery. These events serve as a reminder of the devastating impact an unanticipated disaster can have on people, property, and the ability of communities to recover. This situation reminds one of the devastating earthquakes in Nepal in 2015, which caused large-scale destruction of property and loss of lives. The after-effects of such natural disasters are still continuing in Nepalese society, while they are struggling to cope with the depression caused by the earthquake and floods which has left an indelible mark on the country. The results of these events emphasize the need for enhanced ability to deal with economic and psychic struggles. A financial safety net facilitates faster and more efficient recovery for families and businesses and helps reduce the lasting consequences of these disasters. Whether in Los Angeles or Nepal, these calamities highlight the essential need for comprehensive insurance coverage to protect against the unpredictable forces of nature. How can insurance act as a lifeline for businesses and homeowners and how there may be dire repercussions if it is lacking or insufficient?
Before the fires ravaged more than 10,000 structures in Los Angeles County, insurers had already begun the disturbing trend of not renewing thousands of home-insurance policies in fire-prone areas like the Pacific Palisades and Altadena where the fire consumed nearly 40,000 acres of homes, businesses and landmarks and killed more than two dozen people. Most of the buildings affected were single-family residences burned to the ground. Flames consumed the community fixtures such as temples and churches. Schools were also burnt down.
The widespread cancellations of insurance left many fire victims without sufficient coverage to rebuild, exposing a growing crisis in California’s property insurance market. Francis Bischetti, a homeowner in the Pacific Palisades, shared his experience, revealing that an unaffordable amount left him vulnerable in the face of disaster. As per an article published in the Los Angeles Times, that puts light on the serious impact of lack of proper insurance.
A private forecasting company, AccuWeather, estimates that the total damage and economic loss from the LA fires could range from $250 billion to $275 billion, which is approximately NPR 33 trillion to 36.3 trillion. If these figures hold true, it would make the LA fires the most expensive natural disaster in US history, exceeding the costs of Hurricane Katrina in 2005.
Nepal Insurance, IME General Insurance and Prudential Insurance...
Living in an area prone to wildfires, who would choose not to renew their home insurance policy just because the premiums had become too high? Imagine families in America thinking about how the insurance industry relies on advanced computer models and AI to predict disasters and adjust premiums accordingly. Yet others argue that though AI indeed has improved the forecasting of risk, it has not necessarily translated into fairer risk assessment, and in consequence, insurance companies mainly drive up premiums, making cover less accessible. This family was among those undervalued risks and decided not to seek insurance.When wildfires swept through their neighborhood, they were left with only the charred remains of their home and the burden of significant financial loss. This situation underscores the severe consequences of ignoring potential future risks amid rising premiums.
To make sure that everyone can access insurance to safeguard against losses, the Nepal Insurance Authority (NIA) established fixed tariffs in the insurance sector in 2080 BS, serving as standardized price lists that dictate the premiums insurance companies can charge for their policies. Just like with property insurance policies, insurers are not allowed to alter the prices set by the tariffs for any individual policy.
Evaluating insurance risk requires examining the potential losses linked to specific hazards, such as fire. First, you must estimate the cost to recover from such a loss; for instance, rebuilding a house might cost around Rs 10,00,000. This would provide insurance cover to a residential building for a sum insured of Rs 10,00,000. The basic premium rate is Rs 0.50 per Rs 1,000 per annum, which works out to a net premium of Rs 500 annually. To this, a VAT of 13% is added at Rs 61.75. Further, stamp duty of Rs 20.00 is added. Thus, the total premium payable works out to Rs 585. This concept allows insurers to charge premiums sufficient not only to cover the losses but also to compensate for losses due to acts of natural calamities. Families can budget a portion of their household expenditure for insurance to protect them from the devastating effects of sudden calamities. The pre-emptive step acts as a financial cushion, therefore giving confidence during calamitous periods.
Accidents and disasters can happen at any time and for those without the funds to pay for these unforeseen costs, insurance can be a lifesaver. In 2015, Nepal's insurance companies paid out over $175 million (which is approximately Rs 23.28 billion) in claims for the Gorkha earthquake. However, this amount was only a small fraction of the total economic losses, which were estimated at $5.1 billion (Rs 678.3 billion).
The sparse insurance coverage following the Gorkha Earthquake underscores the protection gap, according to Goran Trendafiloski, head of Earthquake Model Development at Aons Impact Forecasting team. It demonstrates the necessity of more individuals and companies having insurance in order to guarantee that they are adequately protected in the event of catastrophic strikes.
Natural disasters, like the devastating 2024 LA wildfires and other catastrophic events such as hurricanes, floods, and earthquakes, underscore the unpredictable nature of these occurrences and the essential role of insurance in lessening their effects. Insurance helps individuals prepare, protecting their long-term financial stability even when faced with unexpected disasters. For those with loans or mortgages, it safeguards crucial assets and often meets legal requirements. By distributing the financial burden among many policyholders, insurance prevents any one person or family from bearing the entire weight, facilitating a smoother recovery process. It will also reduce dependence on government aid, and therefore, the community can easily and efficiently get back to its feet. Another significant factor is that insurance policies account for inflation when calculating their values, which would be a correct reflection of the rebuilding cost. With the payment of a relatively small premium, a person gets substantial financial security; the potential loss, compared to the premium paid, is very low. After all, insurance is one of the most important assets, which can give psychological security and economic stability during life's most unexpected challenges.
No insurance or insufficient insurance coverage has severe consequences on the people, companies, and communities involved, especially in the event of a disaster. Due to lack of adequate insurance, people risk bankruptcy as they will be liable to cater for all medical bills, home repairs, and other expenses. Without insurance, businesses have poor recovery capabilities, leading to many cases of business closures and job losses and, on the whole, affecting economic downturn. Underinsurance leads to sluggish economic growth while placing unfair pressure on public resources since governments need to divert funds to cover disaster-related support. Without insurance, recovery takes time and leaves the homes and infrastructure in a deplorable state, thereby rendering the communities susceptible to further catastrophes. This financial chaos brought about by such disasters keeps people anxious over their chances of recovery besides the psychological stress.
Author is Executive Director at Insurance Protective Services Pvt Ltd. She can be reached at Pra.tixa24@gmail.com
