Irda Hints It May Lower 10% Surcharge

The Insurance Regulatory and Development Authority (IRDA) chairman N Rangachary today hinted at a reduction in the 10 per cent surcharge imposed on all fire and engineering risk products.

The statement assumes significance in light of the war situation triggered by the US attacks on Afghanistan. Following the September 11, terror attacks on the US, which negatively impacted the global insurance industry, the Tariff Advisory Committee (TAC) had imposed a 10 per cent surcharge on all fire and engineering risk products, effective October 1. This was to form the nucleus of the "catastrophe reserve pool."

Speaking on the sidelines of an insurance seminar in Mumbai, Rangachary said: "We might reduce the surcharge if warranted, so long as the industry can take care of itself." There had been talks of enhancing the surcharge in light of certain covers not being picked up by the global reinsurance market or being picked up at a higher cost.

Even as global underwriters have withdrawn some of the terrorist covers, Indian insurers have stated that they will honour their commitments, even if they may not be able to recover the same from the reinsurer, said Rangachary. The reserve pool to be created would take care of the unforeseen calamities, since the Indian insurance industry does not have any cushion to absorb such events today, he added.

Based on last year's aggregate premium income of Rs 10,000 crore, the estimated corpus for the reserve pool stands at Rs 300-350 crore. This, Rangachary felt, could well grow to Rs 3,000 to 4,000 crore in the next few years. "The reserve pool will have a secondary effect in improving the local indigenous capacity, which is presently insignificant today," said Rangachary.

The pool is also expected to help the industry retain more than what it does today, though the Irda chief was quick to question the industry's ability to absorb the losses.

Even as global underwriters have withdrawn some of the terrorist covers, Indian insurers have stated that they will honour their commitments to the consumer, even if they may not be able to recover the same from the reinsurer, said Rangachary.

Irda expects government support in raising this reserve pool by allowing for tax exemption. It has been proposed that the additional premium collected in the form of surcharge ought not to attract corporate tax at the rate of 40 per cent.

"The accounting procedure has to be addressed by the Central Board of Direct Taxes provided that the fund is kept separate only to meet contingencies and claims arising out of terrorist and war attacks," said insurance officials.