The monsoon between a curse and a blessing

The significant increase in extreme monsoon rainfalls, a burgeoning of insured values, and fiercer price competition are major challenges for the insurance industry in India. The market is currently going through a complex process of liberalisation and adjustment.

The monsoon is as much a part of India as the country’s extensive dry seasons. Producing about 80–90% of the country’s annual precipitation, the summer monsoon (June–September) is a source of life to India, regulating, as it does, the gigantic country’s water balance. It is particularly crucial for the agricultural sector, which accounts for about a fifth of India’s gross domestic product and provides work for around two-thirds of the population. But the monsoon itself has changed. The frequency and intensity of extreme rainfall have both increased considerably, whilst exceptional rainfall levels have given rise to serious floods and ensuing damage in recent years. In 2005, the highest level of precipitation ever measured on a single day in India was recorded in Mumbai. In 2007, the effects of the summer monsoon were extremely intense for the third year in succession.

The annual overall loss due to flood in the years 2005– 2007 averaged roughly US$ 4bn, three to four times higher than the average for the period 1980–2004. Escalating concentrations of values in exposed regions like Mumbai combined with growing insurance awareness caused insured losses to soar during this period. Is this latest development merely an outlier or the herald of a long-term change in monsoon activity?

Climate change as the cause

Scientific studies show that monsoon activity in central India has changed significantly (Goswami et al. 2006). The daily variability of monsoon rainfall, i.e. the range between severe and less severe daily rainfall events, has increased markedly in the last 50 years. In central India, the number of intense precipitation events per day (at least 100 mm/day) has increased by about a third since 1950. The figure is even more dramatic in the case of extreme precipitation events, involving levels of at least 150 mm/day. It has roughly doubled since 1950 – a highly significant increase in scientific terms. At the same time, there were considerably fewer instances of moderate precipitation events in the observation period. Although these opposing trends mean that average rainfall has not changed, this is not good news. On the contrary: whilst the moderate monsoon is important for India’s water balance, especially for the agricultural sector and the supply of drinking water, intense and extreme rainfall have a major bearing on losses. What is more, the majority of models quoted by the Intergovernmental Panel on Climate Change in its report assume that the total rainfall depths of the summer monsoon will increase in future. Even if there are large deviations between the individual scenario calculations, there is no doubt about the outcome: Indian summer monsoons are very likely to become more extreme.

And this is due to global warming. Sea surface temperatures in the tropical Indian Ocean, for instance, have risen by about 0.5°C over the last 50 years. This results in more moisture reaching India with the monsoon.

It is a risk of change that is difficult to quantify and the Indian insurance industry must give greater attention to devising appropriate solutions – particularly as the values to be insured are rapidly increasing.

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