The Cat pool can function on the lines of terrorism Pool operating in India whereby insurance companies cede the entire premium to the pool and the premium is distributed among the companies based on their participation in the pool. GIC can be appointed as manager to the pool who would decide on the reinsurance protection for the pool. The insurance companies can be given the option to participate as reinsurers to the pool. The government would step in when the liability of the reinsurance protection is breached.
The major catastrophic perils in the context of India is Earthquake & Flood. While Flood as a peril is in built in the standard policies, earthquake is add on cover in India. For Earthquake, India is divided in four zones by the Tariff Advisory committee. We can stick to the same classification or go for an updated classification based on the updated data about the movement of tectonic plates or taking a cue from the Munich Re criterion affecting the rates would be the construction type of the building covered. The TAC classification of buildings can be used for this purpose. The rating can be developed as under :-
Similarly zones can be developed for flood exposure as well. Also uniform rates for flood have to be decided well in advance so that flood premium can be differentiated properly and accounted for.
Similar to in some countries, earthquake & flood insurance can be made compulsory in India. All the residential buildings are registered with the municipal bodies and hence can be asked to take compulsory earthquake & flood insurance at least in urban centres. This can be slowly propagated in semi urban areas too. Since the volume of business would be high, it can lead to softening of rates and hence not a big burden on the policyholders. Commercial & industrial establishments in any way opt for these coverages. Also as the reserves are built over a period of time, it can lead to decrease in rates as well.
With the increase in insurance penetration and the build up of adequate reserve, the liability of government would be decreased considerably in case of catastrophic events. Also gradually the pool can provide cover for other cat events too.