Tax relief likely for contributions to catastrophe reserve
Sidhartha in New Delhi
The government is expected to exempt contributions made by insurance
companies to the proposed catastrophe reserve from corporate tax.
The Insurance Regulatory and Development Authority has proposed
that insurers contribute 5 per cent of their gross direct premium
income to the catastrophe reserve.
Finance minister Yashwant Sinha and economic affairs secretary CM
Vasudev recently met New India Assurance and General Insurance (Public
Sector) Association chairman KN Bhandari to discuss the issue.
Based on the present GDPI level of around Rs 100 billion, general
insurance companies will contribute around Rs 5 billion to the catastrophe
reserve. In case life insurance companies contribute as well, the
corpus of the reserve will swell to nearly Rs 9 billion.
A proposal to this effect has been pending with the revenue department.
The exemption is likely to be announced in the Budget for 2002-03
though it will result in the exchequer foregoing a minimum of Rs 2 billion in revenue.
The catastrophe reserve fund can be used in case liability from
a single incident exceeds Rs 500 million. The reserve will be in addition
to the 10 per cent terrorism surcharge levied by the Tariff Advisory
Committee on fire and engineering insurance.
The reserve was planned following the earthquake in Gujarat on January
26 last year, which resulted in an outgo of around Rs 10 billion
in settlement of claims.
The issue once again hit the limelight following the experience of
global insurance companies which had to settle huge claims after the
September 11 attacks in the US.
The matter was also discussed at a recent meeting of the General
Insurance Council. A provision for insurance companies to contribute
to the catastrophe reserve has also been made in the accounting procedures
governing insurers.
The guidelines say that the reserve is aimed towards meeting losses
which may arise due to an entirely unexpected set of events and not
for any specific known purpose.
"The reserve is in the nature of an amount set aside for the potential
future liability against insurance policies in force," it added.
Detailed guidelines to be issued by IRDA are subject to clearance
from the Central Board of Direct Taxes.
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