Is insurance for rural water supplies a good idea?

Published on: 10/08/2015

As part of the Community Water Plus project, we are assessing successful community-managed rural water supply programmes across India. One of those is a programme managed by Himmotthan, a Society initiated by the Sir Ratan Tata Trust. Through local partner NGOs, they have implemented almost 300 water supply systems in small remote rural villages in the Uttarakhand Himalayans. Among the many interesting features of the programme is the fact, that they demand that communities insure their water supply systems against damage from disasters like floods and landslides. And such disasters pose a real threat. Most of these water supplies are small gravity-fed piped systems, that take water from mountain springs or small streams. During the rainy season some of these streams swell and wash away everything on their way. Also landslides are common, damaging the main pipes.

So, how does the insurance work?

First of all, the insurance covers only the parts of the systems that are most susceptible to damage from floods and landslides: the intake structure and the communal filters that are close to the intake. The main pipeline and distribution network is excluded from the insurance.

Then, the insurance agreement is made between an insurance company and one of the partner NGOs who developed the original system – in this case Himalaya Institute Hospital Trust (HIHT) – on behalf of a large number of water committees. This means that HIHT has a policy with the insurance company for each of the water committees, and has the contact with them in the case of damage.

How the premiums and risks work out is best illustrated by an example. The policy of the village of Kinsu shows that for an insured value of 838.126 Rupees (about 12.000 Euro), a premium is due of Rs. 1490 /year (22 Euro). This is not an insignificant amount for them, considering that their annual revenue from tariffs is about Rs.10,800 (154 Euro). The policy shows how the premium is calculated based on different risk rates. It comes down to an equivalent premium of Rs.2 per Rs.1000 of insured value per year (including taxes and administrative costs). This implies an overall risk rate of 0.2%.

Two of the villages we visited – Kinsu and Kheda Talla – have indeed had to use the insurance on two occasions, in 2010 and 2013. Kinsu for example had damages to the value of about Rs. 100,000 (1430 Euro) in the 2010 rainy season. After those damages occurred, they called in the insurance company via HIHT. An engineer from the insurance company assessed the damage and defined the paying out to be Rs. 62.000 (886 Euro). The remaining amount for the repairs was collected by the water committee from the community members themselves. In the much more damaging 2013 floods, the value of the repairs was almost Rs. 200,000 (2800 Euro). Again the insurance was called in, and now paid out Rs.37,000 (530 Euro). During that year there were State-wide disasters, so HIHT decided to also use some of its own funds to support the repairs in the communities and provided. It is not clear to the villagers, why the insurance company only covered part of the damages.

Now, is this all a good idea? I still have many questions. Whether the 0.2% risk is a reasonable one, can only be determined over a longer period of time, assessing the frequency with which all the insured water committees are affected by floods and landslides. That is a question that both the insurance company and the water committees need to ask themselves. Maybe the insurance company ends up losing out. Or maybe the committees would be better off by putting the premium into their bank account that they have anyway for major repairs. But, what is clear is that the insurance is only to cover capital maintenance expenditure that is due to outside factors – and not to cover "regular" capital maintenance, like replacing parts that break due to normal wear and tear. So, it does what insurances should do: cover risks that are beyond the control of asset owners against forces of nature and bad luck, but not again preventable failures. Though many questions remain, at least we are now getting some practical experience on the discussion whether insuring rural water supplies is a good idea. And I look forward to revisiting the original blog post, when hearing from other examples as well so please share them below.