Section 1: Introduction
Earthquake insurance is crucial as natural disasters can result in extensive economic, environmental, and financial losses, affecting individuals, communities, and entire nations. The financial impact extends beyond immediate damages, with indirect costs such as supply chain disruptions and lost productivity. In some cases, the economic fallout from earthquakes can be so severe that it destabilises national economies, particularly in developing countries with limited resources and infrastructure for disaster response.
With nearly 59% of India’s landmass exposed to varying levels of seismic risk, the aim should be to stay prepared always. Focusing on the 4 R’s i.e. rescue, relief, reconstruction, and rehabilitation is the key. Although India has a well-established disaster risk financing framework, a stronger focus on earthquake insurance and risk mitigation strategies is essential to ensure financial preparedness for a significant seismic event.
Section 2: Frequency of Earthquake Occurrence in India.
The Bureau of Indian Standards (BIS) has classified India into four seismic zones based on earthquake intensity and frequency. Zone II (low risk) covers 44% of India, including central and southern regions such as Madhya Pradesh and Karnataka. Zone III (moderate risk) includes 26% of the country, affecting major cities like Mumbai, Kolkata, and Chennai. Zone IV (high risk) accounts for 18% of the land, covering Delhi, parts of Bihar, Haryana, Himachal Pradesh, and West Bengal. Zone V (very high risk) covers 12% of India, including the Northeast, parts of Jammu & Kashmir, Uttarakhand, Gujarat, Himachal Pradesh and the Andaman & Nicobar Islands.
Further, the two maps below illustrate Peak Ground Acceleration (PGA) contours for India, which measure the intensity of ground shaking expected due to earthquakes. PGA is expressed in terms of gravity (g), where higher values indicate stronger shaking and, consequently, greater damage potential. Map 1 and Map 2 highlight areas of varying seismic risk.
Map 1: 10% probability of exceedance in 50 years (equivalent to a return period of ~500 years)
Map 2: 2% probability of exceedance in 50 years (equivalent to a return period of ~2500 years)
Source: Development Of Probabilistic Seismic Hazard Map Of India
Using the maps it can be seen that the seismic zones can be divided as below:
- High-Risk Areas: Northern India, particularly Jammu & Kashmir, Himachal Pradesh, Uttarakhand, Arunachal Pradesh, and parts of the Northeast, have the highest PGA values (~0.35g or higher). This is due to the region’s proximity to the Himalayan seismic belt, where large earthquakes occur due to the Indian plate colliding with the Eurasian plate.
- Moderate-Risk Areas: The Gujarat region (Kutch), Maharashtra, parts of Rajasthan, and the Indo-Gangetic plains show moderate hazard levels (~0.15g–0.25g). The 2001 Bhuj earthquake (Gujarat) a historically significant earthquake occurred in this zone and caused widespread devastation as can be seen in map 2 with a PGA of 0.35.
- Low-Risk Areas: Southern India, including Kerala, Karnataka, and Tamil Nadu, has the lowest PGA values (~0.02g–0.08g), indicating a lower likelihood of strong shaking.
Areas with higher PGA values (above 0.2g) face a greater likelihood of severe damage during an earthquake, making earthquake insurance a crucial financial safeguard for residents and businesses in these regions. However, even lower-risk areas are not entirely immune, as demonstrated by the devastating 1993 Latur earthquake in Maharashtra, which struck an area previously considered low-risk. This highlights the importance of preparedness across all regions. Additionally, seismic hazard maps play a key role in influencing insurance premiums, with higher PGA values leading to increased premiums due to the elevated risk associated with these areas.
Section 3: Evaluating the Gaps in India’s Insurance Sector
The demand for earthquake insurance is a function of price and income. Though insurance is considered a normal good (positive income elasticity), general insurance penetration in India remains low (4.2%) compared to the global average (7%) due to factors such as lack of purchasing power, disinterest, and cultural attitudes. To increase uptake, mandatory insurance through legislation or mortgage requirements may be necessary, although politically challenging.
The adoption of earthquake insurance in India remains low due to several key challenges. First, insurers face an intertemporal imbalance—they collect steady premium income over time but are periodically hit with massive losses from rare, high-impact earthquakes. This creates financial strain, as they must maintain large cash reserves to cover such events, limiting their ability to allocate funds elsewhere. Additionally, pricing earthquake insurance is complex because premiums must reflect long-term risk rather than short-term predictability, making coverage appear expensive to consumers.
Furthermore, insurers increasingly depend on reinsurance (insurance for insurers) to manage large payouts. However, as catastrophic events become more frequent and severe due to climate change, reinsurance has become both costlier and harder to obtain. These financial pressures make earthquake insurance less attractive for insurers, leading many to raise premiums, limit coverage, or even withdraw from high-risk areas.
Another critical factor is the lack of mandatory requirements. Unlike fire or health insurance, earthquake insurance is not included in standard homeowner policies, nor is it required by mortgage lenders. As a result, most homeowners do not opt for it, even when available at competitive rates. This leaves individuals vulnerable to financial shocks, as uninsured earthquake damage leads to asset losses, reduced personal savings, and disruptions in household spending and consumption. Businesses also suffer indirect losses beyond physical damage, including operational disruptions and economic slowdowns.
Section 4: Studying the Insurance Models
This section explores two predominant insurance models used in global economies and examines their impact on economic stability and resilience. It also highlights the success of these models in mitigating financial risks and supporting post-disaster recovery efforts.
4.1. Model 1: Insurance Premiums, Limits, Coinsurance and Deductibles
In this insurance scheme, the primary insurer collects premiums from policyholders and provides compensation for seismic losses based on pre-determined terms when a damaging earthquake occurs. The total insurance premium is composed of three key components:
P pure is the expected cost of covering the risks, essentially the fair price for risk coverage based on the probability of an earthquake occurring within a given return period. P risk accounts for additional risk factors, including the insurer’s capital reserves, reinsurance costs, regulatory compliance, and overall market conditions. C transaction includes expenses related to marketing, policy administration, claims processing, broker fees, and other operational overheads.
The payout takes the function of
Where the policy payout function of an insurance contract is Fpayout for the damage cost CEQ, in earthquake insurance, policyholders receive payouts based on predefined terms that balance affordability and risk-sharing. A key component of this structure includes the deductible (D)—the portion of the loss that the policyholder must bear before the insurance coverage applies. Insurers also set a limit (L), which represents the maximum payout they are willing to provide. Additionally, a coinsurance factor (γ) determines the percentage of the loss covered beyond the deductible.
There are 3 global examples considered in this type of model.
The study underscores that well-designed insurance structures with appropriate limits and deductibles are critical for effectiveness. The JER model seemed the most appropriate for India to mitigate the risks in both the Gujarat and Assam earthquakes. Appropriate deductibles and limits also ensure that the burden on the government is reduced and paced properly. Penetration is another important aspect that needs to be looked at. The penetration for New Zealand is so high due to a combination of mandatory earthquake insurance for residential properties and the automatic inclusion of EQC cover with private house and contents insurance.
4.2. Model 2: Parametric Insurance: A Faster Approach to Disaster Coverage
Parametric insurance is a policy that provides a predetermined payout when a specific event, such as an earthquake or hurricane, reaches a set threshold (e.g., a 5.0 magnitude earthquake). Unlike traditional insurance, which requires an assessment of actual losses, parametric insurance triggers payouts based on independent third-party data, such as seismic readings from government agencies. This model offers several key benefits. First, it ensures rapid payouts, significantly reducing the time required for financial relief, which is crucial for disaster recovery studies indicating that faster payments can be up to 3.5 times more effective in minimizing overall economic losses. Additionally, since payouts are based on fixed triggers rather than damage assessments, the risk of fraudulent claims is lower, and policyholders remain incentivized to take preventive measures. Furthermore, parametric insurance plays a vital role in disaster preparedness, enabling governments, businesses, and NGOs to access immediate funds for emergency response, and strengthening resilience against catastrophic events.
Global example:
Mexico pioneered the use of catastrophe bonds (Cat bonds) for disaster risk financing in 2006 and has since issued 20 such bonds. These bonds operate on a parametric basis, meaning payouts are triggered when a predefined event, such as an earthquake or hurricane, meets specific criteria. Cat bonds offer investors higher-than-average returns in exchange for assuming disaster risk. If no qualifying catastrophe occurs during the bond’s typical one-to-three-year term, investors receive their principal plus interest. However, if a disaster meeting the set parameters takes place, the sponsoring government can access the bond’s funds through a Special Purpose Vehicle (SPV) to cover insurance claims, potentially leading to a partial or total loss for investors. This mechanism enables governments to transfer disaster-related financial risks to capital markets, strengthening their ability to respond to large-scale natural catastrophes.
A notable example is the FONDEN 2017 catastrophe bond, issued under the World Bank’s MultiCat Program, which provided $360 million in financial relief following the September 2017 earthquakes in Mexico. This bond played a crucial role in covering losses from both earthquakes and hurricanes across different regions, highlighting the effectiveness of parametric insurance in disaster risk management.
4.3. Penetration of parametric insurance in India
While there is no development in the view of earthquake insurance, Nagaland became the first state to adopt parametric insurance against heavy rainfall, providing financial security for flood-prone areas. Additionally, the Self Employed Women’s Association (SEWA) introduced a heat insurance scheme for its members in Gujarat, while Kerala’s KCMMF is piloting coverage for dairy farmers against heat-induced milk yield losses. There is still a need for the country to develop policies in place for Earthquake insurance.
It can be analysed that a hybrid model where governments use both model 1 and model 2 can provide full coverage for both individuals and infrastructure.
Section 5: Conclusion and Need for Earthquake Insurance in India
Natural disasters are a common occurrence in India, with a report from the Centre for Science and Environment revealing that in the first nine months of 2022 alone, the country faced disasters almost daily. Between 2019 and 2023, India suffered damages worth $56 billion due to weather-related calamities. Funding for disaster management primarily comes from the National and State Disaster Response Funds (SDRF), with additional support from international aid. The National Disaster Management Authority (NDMA) oversees these funds, with the central government contributing 75% to 90% of the required finances, while state governments cover the remainder.
India’s high seismic vulnerability, coupled with rapid urbanization and inadequate preparedness, highlights the urgent need for comprehensive earthquake insurance. Despite the increasing frequency of tremors and past devastation, insurance coverage remains limited, leaving individuals, businesses, and even governments financially vulnerable. A well-structured earthquake insurance framework can provide crucial financial resilience, reducing reliance on post-disaster relief and ensuring faster recovery. Given that a significant portion of India’s landmass falls under high-risk seismic zones, integrating earthquake insurance into broader disaster risk management strategies is essential. By promoting awareness, enhancing affordability, reducing the burden on the government and encouraging public-private partnerships, India can create a more sustainable and financially secure approach to managing earthquake risks.