Do regional disaster risks determine insurance spending? Evidence from organised manufacturing factories in India

• Published in: International journal of disaster risk reduction 2024-11, Vol.114, p.104964, Article 104964
• Main Authors: Bhowmik, Sohini, Roy, Gopal Krishna
• Format: Article
• Language: English
• Subjects: Disaster risk management; Hazard vulnerability; India; Insurance expenditure; Organised manufacturing
• ISSN: 2212-4209; 2212-4209
• DOI: 10.1016/j.ijdrr.2024.104964

Insurance is a crucial risk management tool for firms. This paper examines the factors determining insurance expenditure among organised manufacturing factories in India, focusing on the role of regional disaster risks. We gather information on insurance expenditure and other factory-level factors by utilizing unit-level data from the Annual Survey of Industries for 2018–19. We integrate this data with the spatial disaster risks index across Indian states, obtained from the Disaster Risks and Resilience in India report by the Ministry of Home Affairs, Government of India, and the United Nations Development Programme (UNDP). The state-level disaster risk index captures the regional risk environment that influences insurance expenditure at the factory level, even after accounting for factory-specific factors. We test various hypotheses on the determinants of factory-level insurance expenditure using the ordinary least squares method in a multiple linear regression framework. Given that the decision to spend on insurance reflects a corner solution problem, with a substantial share of factories reporting zero expenditure while others incur strictly positive amounts, we employ Tobit and Cragg's hurdle models to ensure robustness. Our results indicate a positive and statistically significant association between the location-based spatial disaster risks index and factory-level insurance expenditure. Factories located in a state with higher disaster risks spend significantly more on insurance expenditure. Among other factory-level factors, our findings indicate that factors such as gross value added, subsidies, the value of imported inputs, export share, type of organisation, age, the value of plant and machinery, and depreciation significantly affect insurance expenditure. •We focus on the role of regional disaster risks on the insurance expenditure of factories.•We use nationally representative factory-level data and State-wise disaster risks index.•We use OLS, Tobit, and Cragg's hurdle regression models.•Higher regional disaster risks are associated with increased insurance spending.•Factory-level factors include gross value added, repair and maintenance expenditure, invested capital, export share, foreign shareholding, etc.