Stock brokers may have to pay more for risk cover

With the stock markets continuing to be volatile, brokers may have to shell out 20-25 per cent more in premiums for getting a cover against transactional risks.

Brokers purchase professional indemnity cover to protect them against errors and omissions while offering professional services. In 2001, the Securities and Exchange Board of India (Sebi) had mandated a cover of at least Rs 5 lakh for each broker.

Executives at insurance companies feel that claims against brokers may go up since major stock indices are down to nearly 50 per cent of the peak levels witnessed in January 2008. “As a result, the premium rates may have to be increased,” they said.

In August 2008 itself, a large broking firm was forced to make a claim of Rs 2 crore following an allegation by a client. The client had claimed that the broker had keyed in a wrong figure, or had pressed the ‘buy’ instead of the ‘sell’ button.

“Ideally, brokers dealing with equities should increase their cover size. But because of lower earnings, brokers are not renewing their cover, or are going in for lower covers,” said an intermediary who deals with such risk covers.

Large brokerage houses, such as ICICIDirect, Sharekhan and Edelweiss, take a cover of Rs 20-30 crore for protection against the risks arising out of transactions.

Edelweiss has the mandate of providing an insurance cover to more than 700 Bombay Stock Exchange and National Stock Exchange brokers, said industry sources.

Others, such as Enam, Emkay and Religare, which have their own insurance broking arms, service their own brokers.

“The cover size will come down by 30-40 per cent this year and the premium will roughly be in line with the risk covered,” said Emkay Insurance Brokers Chief Executive Officer Akhilesh Singh.

At present, New India Assurance and Oriental Insurance provide stock brokers with professional indemnity covers. Such covers come up for renewal in June.

Since the bear run started last year, stock broking firms have seen their businesses shrinking by around 40 per cent due to lower volumes. As a result, the liability also came down. In fact, many brokers and sub-brokers have shut shop.

“The chances of (an insurance company) getting hooked up with bad customers (brokers) will rise due to the reduction in the number of stock brokers seeking protection,” said Oriental Insurance General Manager N K Singh.