GIC Re stares at a record Rs 1,820-cr hit on net worth

General Insurance Corporation of India (GIC Re) faces a Rs 1,820-crore hit in net worth on account of the unprecedented claims due to global catastrophes in Japan, New Zealand, Australia, USA and Thailand. To make matters worse, this will directly hit GIC's books, as 90 per cent of the risks did not have reinsurance support, given usually by global reinsurance majors.

Total claims arising from from all these catastrophes would be around Rs 2,050 crore, of which reinsurance coverage taken by GIC stands at Rs 230 crore. This means nearly 90 per cent of the risk was retained by the reinsurer. This makes it the worst year in terms of net claims for GIC, surpassing net claims of Rs 650-750 crore due to floods in Mumbai in 2005.

According to sources, finance ministry has initiated a probe into the books of GIC Re to see if the retention limits have been violated. Retention limit per exposure is generally capped at five per cent of the net worth.

"On an average only 10 per cent of the risk was reinsured with the global reinsurers like Swiss Re, Munich Re or Lloyds of London. This has lead to these unprecedented losses in the books of GIC. Government has asked to furnish the details," said a senior GIC official, on the condition of anonymity.

Figures indicated that total claims from Thailand floods were to the tune of Rs 1,200 crore ($240 million). For this exposure, GIC had reinsurance covers worth Rs 137.5 crore ($27.5 million), which implies the net loss for GIC from Thailand alone would be in the region of Rs 1062 crore or $212.5 million.

In the case of exposure to Japan, GIC took reinsurance cover for only four per cent of the risk, as a result it will have to swallow almost all of the Rs 600-crore claims arising due to the tsunami and earthquakes, which rocked the island nation last year. Similarly, more than 90 per cent of the exposure in Australia, New Zealand and USA were retained, as GIC opted for low reinsurance covers.

During 2010-11, GIC Re reported a net profit of Rs 1,033.4 crore, where the net premium stood at Rs 10,512.6 crore. The overseas business constituted 40.3 per cent of the total premiums. The net worth stood at Rs 9,820 crore whereas the total free reserves were pegged at Rs 9,390 crore.

To cover its foreign businesses, GIC purchases mostly three types of covers GIC Foreign Programme, GIC Japan Programme and GIC USA Programme. Under GIC Foreign Programme, which includes reinsurance support for almost all countries except Japan and USA, the total reinsurance cover purchased by GIC Re annually is at around $100 million or Rs 500 crore. Similarly, for Japan and USA covers, the reinsurer purchases covers worth $5 million (Rs 25 crore) and $1 million (Rs 5 crore), respectively. "The claims this year from these areas shows reinsurance purchases have been grossly inadequate. It needs serious introspection," said a source.

NATURE’S WRATH GIC’s books will feel the heat of catastrophic events around the world
Country	Catastrophic event

Total
Claims
($mln)

Reinsurance 
coverage taken
($mln)   

Net Loss
($mln)

% of risk
reinsured

Net retention (%)

ThailandFloods240.027.5212.511.588.5 JapanEarthquake/
Tsunami120.05.0115.04.295.8 Australia & 
New ZealandFloods/
Earthquake40.012.527.531.368.8 USAHurricanes10 .01.09.010.090.0 Total 410.046.0364.011.288.8 Net Loss = Claims-resinsurance cover taken;  Conversion rate:$1 = Rs 50                                                         Source: GIC

The current financial year has been the worst in terms of claims due to the global catastrophes. Japan faced the worst natural disaster this financial year with a combination of earthquake and Tsunami and consequent outbreak of fire, which lasted for close to two weeks.

The total economic loss was pegged at $409 billion by the global reinsurers. Before that, there were two major catastrophic events -- quake in Christchurch, New Zealand, and floods in Australia, where the total economic loss was pegged at more than $50 billion. In October, devastating floods hit Thailand, where the total economic losses were estimated to be more than $400 billion.