Insurance Firms Split Over Catastrophe Reserve Account

The insurance industry is vertically split over the issue of imposing fresh burden on corporate India now when the economic slowdown has hit industries across the board. The public sector insurance companies are meeting on Monday to take stock of the situation.

The 'catastrophe reserve account' set up at the directive of the Insurance Regulatory and Development Authority (Irda) may be further raised once the insurance companies reach a consensus. Highly placed sources in the insurance sector said the additional surcharge would not necessarily be in a uniform manner.

According to a senior official, "all segments are not exposed to the same hazards, and premium is thus based on the risk rating." It is likely that in the next round, there will not be a uniform levy across all policies, he added.

The 10 per cent surcharge on insurance premium on fire and engineering risks is just "a small beginning, and will form the nucleus of the catastrophe reserve", said insurance officials.

Keeping in view the aggregate premium of the four state-owned insurers last year, the surcharge will effectively create an initial corpus of around Rs 350 crore. The funds will be maintained by the respective insurance companies in a separate account to be invested solely in Central government securities.

"There is no great hurry for setting up this reserve fund. Much depends upon whether or not this is the right time to impose the additional levy on the corporates in view of the present recessionary conditions," a senior official from the public sector said.

The domestic industry can bear any single loss of up to Rs 375 crore and anything more than that is reinsured, M K Jindal, assistant general manager of The Oriental Insurance Company Ltd, said.

The Gujarat earthquake cost the four insurers Rs 250 crore. Of the aggregate Rs 10,000 crore premium collected last fiscal, 89 per cent is retained in the country and only 11 per cent of it is reinsured overseas.

The government has adopted a cautious approach in creating a catastrophe fund as the global insurance industry -- plagued by the massive claims arising out of the US attacks -- has capped the terrorist cover at a lower level. Indian corporates have received cancellation notices on the terrorist cover for mega risks, asking for higher premiums for reinstating the cover.

"The decision to set up a fund has been taken as a consequence of the terrorist attacks on the World Trade Centre in the US. Nevertheless, the corpus will not be restricted to meet the claims arising out of the terrorist attacks. It will also include other calamities such as earthquakes, flood, storm and war," Jindal said.

The need for enhancing the catastrophe reserve account is crucial for India as, unlike in the West, terrorist cover is included in all tariff policies, and not bought as a separate cover. As some international underwriters are cancelling terrorist cover, the Indian industry will take a view on segregating terrorist cover from tariff products.