Home insurance for protection against natural disasters

India is one of the most disaster-prone countries in Asia, unfortunately, the most ravaged in the last ten years owing to natural hazards. It ranked 85th out of 180 countries in 2019’s World Risk Report with 54% vulnerability to natural disasters like earthquakes, floods, droughts, and cyclones. 

At first glance, the data on nature wreaking havoc may not seem alarming or noteworthy. After all, we’d all like to think, “that’s not going to happen to me”. Consider the below numbers that put things in perspective:

  • Data reveals that 68% of the country’s land is drought-prone, 60% is earthquake-prone, 12% is flood-prone while 8% is prone to cyclones. 
  • In 2018, India ranked first globally in terms of the number of people affected by natural disasters; that number was 23,910,348. Kerala floods in that year caused a loss of property and crops amounting to Rs 8000 crore. 
  • As many as 340,000 buildings collapsed in the wake of the 2001 Gujarat earthquake. 
  • In 2019, there were 8 cyclones in India, notably Cyclone Fani, a category 3-4 hurricane that damaged property in 14 districts of Odisha.
  • The most alarming statistic is that only 5% to 20% of these losses are actually insured, the rest are just unrecovered.

Loss of lives could still be averted as the Indian government is adopting sophisticated disaster forecasting and early warning systems. But the loss to property is inevitable. Naturally, one wonders about housing societies and how safe they are against such threats. Are they better off? What most home buyers, home loan applicants, and society residents know about insuring their homes against natural disasters? Let’s find out.

Low market penetration of home insurance

Asian Development Bank’s research paper on Impacts of Natural Disasters on Households in India (published in 2019) cites that in developing countries like India, (non-life) insurance penetration is as low as 0.93% and insurance density is $13.2 as opposed to the global average of $285.3.

The most commonly known and purchased insurances are life, health, and auto insurance. Indian insurance companies have claimed a similar figure, stating home insurance accounts for less than 1% of their policy sales.

What does home insurance cover?

Most insurances in India sell comprehensive home insurance policies which cover man-made calamities like theft, fire, malicious damage, riots, aircraft damage as well as destruction caused by an Act of God such as tornadoes, floods, lightning, storms, and earthquakes. Those living in apartment complexes are already covered by the society who purchases insurance for the buildings known as Housing Society Insurance. This is because housing society bye-laws have mandated general insurance for society covering it against natural or man-made calamities, but standard and optional coverage regarding covered components may differ for each provider. For instance, some insurance may only provide coverage for fire, storms,  riots, floods but may exclude earthquakes. It’s prudent to thoroughly check every coverage component and opt for a plan that insures you against all types of calamities, even if you may have to pay additional premiums for add-ons. However,  housing insurance is quite affordable in India. The annual premium could be between Rs 4000 to Rs 5000 for comprehensive coverage for one household with a 1000 sq feet home. Of course, there’d be deductibles, limits on claim amounts, and other conditions; better to compare five different policies before choosing the right one.

Structure cover vs contents cover

Housing Society Insurance provided by most companies covers structures of buildings, common areas as well as assets (like elevators, tanks, electric/mechanical installations). 

Structure cover includes the physical structure of the building while contents coverage includes the assets and equipment/ appliances inside the home. Buy structure cover only if needed because the society typically covers the structure and may or may not cover contents. In that case, homeowners should opt for content coverage on their own.

ADB’s research paper revealed that even 15 years ago, during 2005 Mumbai floods, medium to higher medium income group families reported average damage of Rs 69,000 in estimated repair or replacement cost of damage to assets and equipment in their households. Today the story is different because the losses would be more extensive. Due to steady rise in per capita income and middle/ upper-middle class affluence, the damage would be anything between Rs 4-8 lakh. This is because more homes these days are lavishly furnished and fitted with smart TVs and refrigerators, expensive washing machines, multiple ACs, laptops, smart consoles, and home security devices, to name a few.

Keep in mind that the insurance sum is determined not by the market value, but by reconstruction value of the structure, i.e. how much it would take you to reconstruct the home. 

Contents are valued at the market value of the same/similar products after depreciation. It’s generally recommended that you choose a replacement (full replacement value of an asset) settlement in place of ACV (Actual Cash Value, which is the replacement amount after depreciation).

Check with your society to see if the policy has the provision of reconstruction of a building or just the depreciated value of the building since some societies choose to pay low premiums for only the depreciated value. 

Home insurance is a choice that every homeowner should make only after due diligence. It’s even more critical if you’re buying a home through a bank loan as you’d not want to pay for expensive damage repair out of pocket.  Sometimes home insurance is mandatory with a home loan. Check local meteorological data to see what calamities you may be prone to and consider that while buying home insurance. Keep all insurance documents in a bank safe as once you file a claim, a surveyor would be sent to your home to assess damages. Follow all instructions given by the insurance company to follow protocol perfectly from your side while reading the fine print of the insurance agreement rather alertly to be aware of hidden clauses and conditions.

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