Concept of “indemnification” is undergoing a major overhaul in the current regime of globalization.

Question:

Concept of “indemnification” is undergoing a major overhaul in the current regime of globalization. Discuss this concept from the perspective of international commercial transactions and outline the challenges faced by both business houses & law makers.

Solution:

It is critical to recognise at the outset that individuals and businesses that incur loss as a result of a global disaster may be eligible for compensation or indemnification from a range of different public and/or private sources that are not primarily geared toward disaster victims.

Concept:

When a disaster strikes, people may seek financial assistance from the sources. Occasionally, the loss could have been compensated had the victim obtained the necessary private insurance in advance or qualified for the applicable government programme (e.g., due to insufficient prior/recent wages). Occasionally, though, there was no means to secure protection ex ante (e.g., this was an excluded risk from available insurance). Occasionally, some advance protection has been negotiated, although it is widely acknowledged to be miserably inadequate ex post.

Private insurance’s optimal risk conforms to the statistical feature known as the “law of large numbers.” For these risks, each individual policyholder has a relatively tiny chance of loss that is unrelated to other policyholders’ losses. When a private insurer sells a sufficient volume of policies covering these types of risks, the insurer can be assured that the covered losses for each policy term will not be much greater than the risk-based premiums collected from policyholders. Thus, the optimal risk for private insurance is one that significantly decreases the insurer’s cost and profit fluctuation.

In most jurisdictions, private insurance covering catastrophic catastrophes does not satisfy the law of large numbers. Insurance is generally managed by state legislation and is offered on a state-by-state basis by private insurers. Within any state, a single natural disaster can result in the same types of losses for a large number of policyholders. The risk of loss is not independent among policyholders, but rather is associated or dependent. For these types of risks, the insurer cannot be certain that the risk-based premiums it has received will pay the insured losses for each policy period. Calamity risk can result in significant unpredictability in insurer costs and earnings, with the potential to significantly disrupt the market for private insurance.

As the population has grown and geographical concentration has increased, the economy has become more globalised, and the climate continues to change, the nature of risk may have become more correlated over time. The government must ensure that present insurance industry laws are not based on an antiquated view of insurance as primarily involving relatively minor, uncorrelated, or independent risks. The amount of capital that an insurance firm should set aside to cover its predicted obligations is determined by the independence or correlation of the covered risks. Independent risks necessitate significantly less retained capital. Today, insurers’ capital reserves may be insufficient to cover big catastrophic losses. When assessing the adequacy of retained capital for catastrophic losses, the government should investigate if it is possible to remove barriers to capital retention faced by insurers, such as accounting and tax requirements. Capital retention is expensive for insurance companies, and measures that lower these costs would make it easier for insurers to retain the proper level of capital for catastrophic loss.

Due to the multitude of sources that provide compensation and indemnification in the event of a catastrophic loss, laypeople sometimes struggle to select the insurance coverage they require. The decision-making challenge is exacerbated by the difficulties inherent in appraising the low probability/high loss possibilities provided by catastrophic events. Currently, the system needs individuals to evaluate a number of insurance systems, each of which covers specific risks like as flooding or earthquakes. All of these variables contribute to the reason why individuals frequently obtain insufficient insurance coverage. In comparison to the current system, a complete form of disaster insurance may enhance consumer demand. Whether or not such insurance, or any other type of insurance covering catastrophic catastrophes, should be forced by the government depends on whether or not lay individuals are likely to make prudent insurance decisions when well informed about relevant considerations.

Already, the government mandates coverage for certain types of catastrophic loss. Unemployment insurance, for example, normally covers everyone with a recent wage history who is not self-employed. This coverage is offered to anyone who becomes unemployed as a result of a presidentially declared major disaster under the federal Disaster Unemployment Assistance Program. As this programme demonstrates, the government is already involved in the provision of required catastrophic loss insurance.

Nonetheless, the supply of insurance by the government may be exceedingly contentious, as demonstrated by the argument over health insurance. When weighing the merits of either government-provided insurance or required private insurance purchase, it is critical to keep in mind that uninsured losses caused by catastrophic occurrences are almost always paid in part by taxpayers. The question is not whether individuals will receive some form of indemnification in the event of catastrophic loss, but how much and from whom. By adopting a realistic perspective on the issues of catastrophe insurance, government action is more likely to result in the efficient and equitable use of scarce social resources.

Conclusion:

Fair claim resolution has long been a cornerstone of insurance law in every state. However, the conventional civil litigation system may not be the quickest way to resolve disputes involving a large number of insurance claims following a catastrophe. Protracted delay can render any resolution unjust for policyholders in desperate need of the insurance payments. As a result, the government should investigate whether it would be prudent to establish unique procedures for processing insurance claims in the aftermath of a disaster.