Rs 500 cr insurance pool helps India withstand G7 cap on Russian oil

Pool has already insured over 25 voyages, since it was formed in June under national reinsurer GIC Re, says top official

India has been able to push back against the G7 decision of a cap on Russian oil lately because of the success of the Rs 500 crore insurance pool to underwrite imports to India, a government official told Business Standard last week. It has taken away the concerns in New Delhi about the fallout of the  imminent risk that the global insurance industry will throw at Russia from this winter. No consignment of oil and gas contracted at prices above the cap from Russian ports will get a cover from the global insurance industry.

A  top official said the pool has already insured over 25 voyages, since it was formed in June under national reinsurer GIC Re. It was named as a fertiliser pool with a corpus of Rs 500 crore, but covers the risks of oil and gas imports from Russia too. At present India imports 5-7 oil and gas consignments from Russia each month.

Any importer of these commodities can now ask for marine cargo insurance cover from any non-life insurer which is a participant in the pool. The insurance firm offers the cover but books the business directly to the pool. Since the premium is also booked to the pool, it makes the company virtually an agent of the business, run by GIC Re. In other words, the risk is entirely borne by the pool leaving the insurance cover without any exposure of its capital.

On August 26, US deputy secretary of the treasury Wally Adeyemo met Indian finance minister Nirmala Sitharaman to encourage New Delhi to join the price cap. Subsequently, the US Treasury has also issued a note explaining why it is in India’s interest to join the cap. According to Washington DC, the cap “is a way to keep Russian oil flowing into global markets and preserve economic stability—the top priority for G-7 governments—while simultaneously limiting Russia’s profit margin on each barrel sold”. It argues that since a non-participating country like India’s goal is to get the lowest price for buying oil, “the price cap will give them additional leverage in their negotiations with Russia”.

Because of the premium inflow, the size of the pool has begun to gradually expand from the original Rs 500 crore. In the absence of any claim, this will be a happy situation. Since the business is in the books of GIC Re, the insurance companies are also freed of the risk of running afoul of any sanctions that may encompass the sector. It is also providing a vital lesson in active management of marine risks to the company, a lesson largely confined to the UK Lloyds market and other European insurers.

For high risk areas ship owners pay an annual war-risk insurance cover as well as an additional "breach" premium. Those rates had zoomed for shipments from Russia even for those not navigating the Black Sea route.