Saving on Earthquake Insurance

By Dr. J Ghosh

On January 16, Nepal observed the Earthquake Preparedness Day commemorating the 1943 earthquake. But people complain of high premium on earthquake insurance. This article presents how insurance policies available in the local market against earthquake can be made economical.

Going by past records, Nepal has been experiencing major quakes every 70-75 years. According to seismologists, Nepal ranks 11th among the 30 most quake prone countries in the world. In Nepal, the tectonic motion – the movement of plates in the Indian subcontinent towards Tibet that caused the Himalayas to rise - have also been razing cities since the 13th century. And it is likely that Nepal will face another catastrophe in the near future in the Western and Central regions – including the Kathmandu Valley.

The 1934 quake that devastated Kathmandu measured 8 on the Richter scale, killed nearly 11,000 people and 20 per cent of the buildings in the Valley were destroyed. The National Seismological Centre of Kathmandu draws an apocalyptic version of disaster in the future too: the next major quake will kill over 40,000 people and injure another 1-2 lakhs, destroy 60-70 per cent of the buildings and leave 60,000-70,000 people homeless in Kathmandu alone. Nepal will suffer a huge loss of life and property in the Himalayan hills and the urban Terai belt. This is because the houses in the Himalayan and the hilly belts are constructed of stone masonry and they are vulnerable during earthquakes (barring those in Jumla and its vicinity where traditional earthquake resistant measures are in place). During a major earthquake, buildings in Kathmandu, Lalitpur and Bhaktapur will collapse staggeringly. The rural Terai is going to be less affected compared to its urban counterpart due to the use of light construction materials such as hay, thatch and bamboo. The urban Terai will be adversely affected due to the use of concrete.

The students of the Institute of Engineering have conducted extensive research in five districts — Kathmandu, Dolakha, Sindhupalchowk, Kaski and Ramechhap — on how to protect buildings during earthquakes. One conclusion from the research is that there is a dire need to retrofit the stone houses as well as houses in the city core. The strengthening of the stone houses consists of punching holes at the centre of the walls, laying walls of bamboo mesh in the interior as well as the exterior and tying them with a gabion wire. The gabion wire also ties the joists, the rafters, and the ridge. This will give enough time for escape even if the building collapses.

EQ Insurance:

Since earthquakes are very difficult to predict and the damage it may cause is similarly unpredictable, taking an insurance policy against earthquake (EQ) is a wise decision. The premium rates for EQ and its extensions [fire and shock] are costly and most people choose not to get insured against these risks. Being insurers, we need to take the initiative and help them in deciding the sum insured for opting EQ coverage and also make them understand what it actually covers.

Earthquake [EQ] cover is granted as an add-on cover with the payment of an additional premium. Sometimes EQ causes landslide, rockslide, flood, overflow of seas, lakes, reservoirs or rivers and insurance cover includes such losses or damages caused by landslide/rockslide only. However, damage caused by the overflow of seas, lakes etc. would be covered only if the basic cover includes storm, typhoon, andthe flood/inundation group of perils. If the insured has not opted for the flood group of perils, then damage due to these occurrences following an EQ will not be covered, even if the extension for EQ peril has been bought by the insured. Volcanic eruption and other convulsions of nature cannot be covered even by payment of an additional premium.

It is not permissible to issue a fire policy covering certain portions of a building only; otherwise insurance companies will end up covering just the hazardous portion of any risk. However, there are some exceptions: a) The plinth and foundations or only the foundations of a building may be excluded b) Boilers may be excluded from machinery cover. Plinths and foundations of buildings need not be covered since these are rarely damaged by fire. However, if an insured wants to cover them, he is allowed to do so.

In case of earthquake risk extension, the sum insured for the earthquake extension should be equal to the sum insured under the fire policy except for the values of plinths and foundations which may be covered only for earthquakes.

Fire & Shock

If the foundation and plinth are included in EQ fire and shock risks, and not covered under the fire policy, the sum insured on a building covering the EQ risk may exceed the sum insured under the fire policy. All the property of the insured in one complex/ compound should be included for EQ cover.

Suggestions:

(1) The value of plinths and foundations need not be included in the main fire policy.

(2) Include the value of plinths and foundations while calculating premium for EQ and its extension risks. Thus it will help to save premium outgo without compromising the risk factor of earthquakes.

(Dr. Ghosh is a CEO of National Insurance Co. Ltd)

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Nepal ’s Claim on the BPO Pie

Across the world, the demand for BPO (Business Process Outsourcing) services increased at an annual rate of 50 per cent between 2004 and 2006, according to the web site bpoindia.org. At the beginning of 2006, it was estimated that 56 per cent of the global BPO market would be based in India by that year-end. It is likely to be in the region of nine to 12 billion dollars at the end of 2006 and is likely to provide employment to around 400,000 people.

As a result of this BPO boom in India , the spillover effect is being felt in Nepal . This is similar to the phenomenon that took place when garment manufacturing prospered in India and investors noticed opportunities in Nepal also.

After Serving Minds was established as the first call centre in Nepal in 2001, there have been a lot of new entrants in the BPO market. Link Tree, leased the buildings of Himalayan commerce at Balaju Industrial Estate a few years back. It provides employment to 150 people and is showing strong results. It started operations in 2005 and is expanding its portfolio by dialing not only to America, but to the UK and Europe as well.

Also marching ahead by increasing its foreign client-base and offering quality services is Pentasoft, a company that works in the medical transcriptions field. “The current scenario of medical transcription companies portrays a healthy picture,” says Pentasoft’s CEO Suyogya Man Tuladhar. “We started the journey in 2002 with five people and today we employ 130 people for medical transcription, animation and administration.” Starting from a small office at Kamaladi, Pentasoft now operates from an impressive complex at Kantipath and as Tuladhar informs, is growing at the rate of 20 per cent every year.

CEO and President of LinkTree, Ranjit David Ebenezer claims, “The industry will go a long way if peace prevails in the country and if the government listens to our concerns.” He also believes that Nepal can even become among the top three global destinations for outsourcing in the long term and join the league of the Philippines, Malaysia and India.

His confidence is based onNepal’s core competitive advantage of cheap human resource which he says is cheaper compared to India’s, the country that currently occupies about 46 per cent of the global market share of BPO business. David says, “Nepal is more competitive due to language as well. In India, people belonging to different ethnic groups have different accents so it is difficult to train them there while it’s relatively easier here. The cost of manpower is cheap and its availability fairly large too.”

Lack of Managers

However, Nepal faces problems with management. As CEO of Serving Minds, Ashish Kapoor says, though labour is cheap, the industry lacks capable managers. “What we do not have presently are managers who are experienced in delivering global services. Therefore, our organisation is currently working on upgrading the skills ofmanagers so that we can sustain growth.” According to him, his company has entered into an agreement with the Kathmandu University School of Management (KUSOM) to provide a well-rounded MBA courses for his company’s employees. “We are hoping to have 60-70 well qualified managers in the next three to four years.”

Giving an idea about the number of managers needed by BPO business, he says, “To employ 1,000 people, the firm needs 100 managers.”

Another problem with human resource is that the agents (people who attend to clients) do not join the industry with a long term career perspective. They feel that the work is hectic and the work-load huge. Moreover, the timings are odd: they have to work during nights to adjust to the times in the clients’ home countries. Therefore, employee retention is a problem.

But this problem is not unique to Nepal . As Kapoor puts it, any business with a young workforce at the low or entry level will have high attrition. Kapoor’s company, according to him, has a 35 per cent employee turnover annually and he says, “It is not an unusual rate in this sector so our business is designed to cater to that rate. We have efficient performance management and training systems in place that helps us bring newer people up quickly. But this does not imply that we want employees for short terms only. We do encourage people to build and sustain careers with us. There are also some people who have been with us since day one. We offer them further education and support changes in shifts so that people who want to stay with us can do so.”

However, Pentasoft does not seem to be a victim to this high turnover trend because, as Tuladhar claims, it has an annual employee turnover rate of 7 per cent only. According to Tuladhar, it is because of continuous efforts in making the jobs interesting and exciting. “We have an open atmosphere, a sense of belonging and our jobs are not hectic and off schedule as that of a call centre,” he adds.

Cost of Communication

Therefore, the real problems in the Nepali BPO industry are not so much in human resource. They are rather as both David and Tuladhar complain, in the high cost of communication.

According to them, it is the sole reason why the cost of BPO business is higher in Nepal than in India . The cost of data bandwidth is five times higher in Nepal than in India and as a result, Nepal is not as cost effective as India . However, Kapoor says, “Our clients don’t outsource their activities on the basis of cost factor alone. In the past two years, we have provided value to a number of organisations and business associates through the high quality services we offer.”

Nepal ’s Brand Image

In Kapoor’s view, the real problem in Nepal ’s BPO industry is neither human resource nor cost. Rather it is that not many people outside the country know that there are BPOs in Nepal . Kapoor says there isn’t a brand Nepal in the global market and because of the political situation, people do not know that delivery can actually happen from here. “We have not been able to portray Nepal as a destination where quality outsourcing happens,” he says.

However, David does not agree with the claim that Nepal has no brand image at all in BPO. “Our clients are North American Fortune 500 companies and we have Australian and UK based customers too. It proves that Nepal is a trustworthy brand. But the problem arises because other prospective clients are still under the impression that Nepal is a part of India . This is something we need to address very quickly.” According to him the political situation during the last few years, particularly when all the communication channels were closed down after February 1, 2005 , created all the problems. “It disrupted the usual workings of some companies that were not technologically advanced. Further incidents like these could hamper our brand image with foreign clients.”

But with indications that the process that started after the April change is going to ensure long-lasting peace, the BPO industry leaders are optimistic about the future.

They also feel that the government can actually hear their voices now while in the past, it did not even know what BPO was.

The Government’s Role

According to industry leaders, BPO is a knowledge business, employing thousands of people which can revive the economy faster than any other sector. The returns are quick, the capital required is low, it can contribute very large amounts as tax and it also is a great source to earn foreign currency. So BPO and IT can be the drivers for economic growth. The achievements made in India and many countries in eastern Europe are proof of this. But for that to take place in Nepal , the government has to make concrete changes in its attitude.

“We want the government to offer us tax holidays so that we can compete with our counterparts in other countries where they are enjoying these facilities,” says Kapoor. Currently the state-owned Nepal Telecom (NTC) has monopolised optical fiber connections. If competition is allowed in this sector and the cost of communication decreases, it would be a major boost to BPO and IT industries, he says. As another hurdle, he points out that though the FDI policies in Nepal are quite liberal, the procedures are not clear yet. To address this problem, he says that signing investment protection treaties with countries from which investment is expected.

Tuladhar pins his hopes on the expectation that the government will honestly implement and IT policy as soon as possible. “This has already been done in India where the government brought an IT Act in 2000. The Bill provides a legal framework for the recognition of electronic contracts, electronic filing of documents, prevention of computer crimes, etc. Such laws already exist in Nepal but the mechanism to implement the law is weak. This makes our work vulnerable. We need to have a proper controlling mechanism,” he says.

Furthermore, he feels that the government also needs to change thelabour laws by including provisions suitable for the BPO industry and to provide power supply in a subsidised rate in order to make the industry globally competitive. India has already realised that BPO is a major employment provider. It recognises the importance of venture capital funding for BPO industry development and the Ministry of Information Technology has set up a National Venture Fund for the software and IT industry with a corpus of Rs. 100 crores. The main aim of the fund is to provide venture capital to start up software professionals and small IT units. Nasscom (the most important promoter of the IT/BPO industry in India) has been playing a crucial role in helping the IT industry achieve the IT and ITES vision to take India far ahead of other players.

Nepal’s future will be bright if the right strategies are adopted. The burgeoning Indian economy means that Indian companies in search of labour cheaper than in India will look to outsource their own activities. As the Link Tree CEO says, “India is a huge economy with 500 million middle class people who buy mobiles, TVs, surf the Internet and indulge in telephone banking. Customer services have to be provided for these people at low costs. So where are they going to outsource these activities? They will then turn their attention to Nepal as it will be a natural back office. That’s when Nepal will grow, not through North American or European markets but through Indian customers. We are looking forward to doing business with Indian companies since Nepalis can offer services in English as well as in Hindi.”

The Pentasoft CEO is also expects Nepal to be a hub for outsourcing in the years to come. He is planning to go into the animation sector because it is where Pentasoft’s expertise lies. He says it has an immense potential since there is a huge surge in outsourcing of animation globally. Similarly, Kapoor says that within five years, his company will be specialised in different portfolios. One more hope is that if the government relaxes its foreign investment regulations, there will be growth in the Nepali BPO sector also through cross-border mergers and acquisitions with and by Indian companies.

(By Manish Bikram Shah)

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