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Now India will pay for US typhoons

July 28, 2006 04:23 IST
A catastrophe like Hurricane Katrina in the US would have the potential to blow up a part of the profits of large Indian corporates.

That is because in the detariffed regime from 2007, the premium on large risks of over Rs 100 crore will be driven by international movements.

Global reinsurers raise reinsurance rates across the board for all countries the moment they suffer huge losses on account of catastrophes.

Till now insurance premiums on large corporate risks were governed by tariffs set by the Insurance Regulatory and Development Authority, which were accepted by global reinsurers.

Once the controls on insurance premiums are lifted, the pricing will have to be based on the rates quoted by global reinsurers.

In its near-final guidelines on "file and use" requirement for general insurance products in the detariffed regime, the IRDA requires general insurers to quote the same extent of cover, deductibles and claims conditions to the client as that are quoted by reinsurers.

The regulator has also emphasised that insurance companies must have a back-to-back arrangement for reinsurance support.

In case, there is variation in the terms and conditions of the policies underwritten from those in the reinsurance contract, the insurance company will have to get it approved from the company's appointed actuary and then file the policy with the IRDA justifying the variation. The policy can be offered to corporates only after approval from the regulator.

The IRDA, in the guidelines, has introduced a new concept of "large risks" as against "mega policies" that exists now. Mega policies are covers where the total sum insured is Rs 10,000 crore at a single location or the probable maximum loss is above Rs 1,054 crore.

For defining large risks, IRDA has brought down the floor to Rs 1,000 crore or more for property insurance or Rs 100 crore or above per event, for liability insurance or for packaged insurance products.

With the introduction of large risk, mega policies under the present fire tariff will fall into the large risk category. There are currently around 20 mega policies in the country. A substantive chunk of these policies are offered by public sector insurance companies.

According to industry estimates, there will be around 500-600 policies falling under the new definition of large risk policies.

Public sector general insurers, which have larger risk appetites, reinsure 25-50 of their large risks, while the private sector general insurers, which are still smaller in size, reinsure 90-95 per cent of the risks they underwrite.

Reinsurance is an agreement whereby an insurance company transfers part or all of its risk of loss under the insurance policies it writes to reinsurers.

Catastrophes like Hurricane's Katrina and Rita did not have any bearing on reinsurance premium rates for Indian policies in 2005 as overseas reinsurers decided the premium for Indian policies based on the Indian tariff rates.

However, this would change once the general insurance industry embraces the tariff free regime in January next year. Currently, 70 per cent of the general insurance business is under tariff which translates into premium of over Rs 18,000 crore. The products under tariff are fire, engineering and motor.

According to insurance experts, by introducing these conditions, IRDA wants to discipline the insurance companies and therefore have asked them to sell large risk policies that have back-to-back reinsurance support.

Falaknaaz Syed in Mumbai
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