Many of the buildings are uninsured despite it being mandatory norm to have fire insurance. What are the reasons?

Despite mandatory norms for every building to have an insurance against fire, many buildings are uninsured. The 2011 tsunami in Japan is a grim reminder of the fact that despite the rapid advances in technology, humans are still vulnerable to nature’s fury. Closer home, in India, there has been no dearth of natural and man-made disasters in the last decade. And yet there are no takers for property insurance. Insurance advisor Kabir Ponnappa says, “Many insurers in Japan and even reinsurers had to bear the brunt of the losses that virtually wiped out their capital. So, the underwriting norms and structuring of premium for property insurance has to be stringent, fit for purpose and relevant. However, in India, property insurance is not something that is as popular as health or motor insurance.”

Naveed Akhthar, a designer in a fire safety firm adds, “Since the building complexes are equipped with fire safety and surveillance systems, developers do not see the need for property insurance after a building is commissioned. The sad part is the tendency to view insurance premiums as a waste of resource if no claim arises”. The real estate sector says it is burdened by increase in service taxes and also rise in the lending rates by banks. Several builders have simply not paid their dues to the vendors and knowing the tenuous legal system in India, they are rest assured that nothing will come out of legal notices. Many builders have contributed to the NPAs (non-performing assets) in banks. Insuring buildings is far from their mind.

Though it is a known fact that there are different kinds of property insurances available in India—pre construction stage, construction stage, post completion and commissioning stage—hardly any real estate firm avails of these insurance schemes or at all.
 
Privatisation of the insurance sector in India has not resulted in much excitement about selling of property insurance as much as there is on motor insurance and health insurance for the following reasons:
1.   The poor reputation of the real estate sector poses a major risk for the underwriters. Due to an unprofessional set up in the realty sector, a risk that is looking attractive today may be an adverse one due to cyclical changes in the economy.
2.   Ethical behaviour and real estate industry do not go hand-in-hand. So, in such a case, the insurance principle of Uberrima fides (Utmost good faith) falls flat.
3.   The risk of claims being made by real estate players to profit out of it is probably high. Where does this leave the insurance principle of indemnity?
4.   The real estate sector seems to be characterized by avarice. The propensity to demand payments in cash from clients (home buyers), using ingenuous ways to evade taxes, using bribes as a way of getting things done, disrespecting the laws of land, using money power to circumvent municipal byelaws and rules, undervaluing the asset at the time of registration, over dependence on banks to finance their projects, indifference to adopting frugal measures at the time of a down turn—all these factors contribute to a high underwriting risk.
5.   Clearly, it will be a Hobson’s choice for insurers to underwrite property insurance. Even if they write, you can’t blame the underwriters for loading the premium. It is also vital for the insurers to reinsure this risk. In case of private insurers, who are breaking even only recently, it is preposterous to expect them to underwrite property risks and expose their capital to risk.
So, the real estate sector buys property insurance only for the sake of tokenism.

In June 2011, the print media in Bengaluru was full of reports about the fracas a prominent builder got into with the municipal corporators. The corporators alleged that the builder (with roots in Pune) has built a mall by flouting the development norms while the builder maintains that he has all the approvals in place. This happens routinely and scares away insurers.

While the government of India has to lend a patient ear to the problems faced by the real estate industry and work at making corrections, the builder community should be pressured to run development projects by following the fundamental principles of project management, including risk management which includes property insurance. The trick to be employed here is to induce the builders to embrace property insurance by a combination of regulation by the state, penalty for non-compliance as well as concessions they are demanding.