Pricing The Premium Right

Although no one is quoting figures, a methodology for pricing premium is gradually evolving. Whether RBI hands it over to the DICGC or to the insurance companies the calculation of the premium would basically be dependent on the systemic risk that the sector is facing. A study would be made on the rate of failure of companies over the past five or ten years. The total loss these companies have made would then be agregated and divided by the total deposits of the NBFC sector. This would be the pure premium. Added to this would be the administrative expenses. The expected investment yield of the funds deployed would then be subtracted from the sum to form a core premium that would be common to the entire sector.

In addition to this pure premium there is a likelihood of a differential premium being charged to companies depending on their risk profile. This is the most complex part. How can the risk factor be quantified? The P R Khanna Committee recommendations have suggested that the RBI undertake its own system of supervisory rating. This rating could eventually provide clues to the risk rating of a company, and to the differential premium. It is expected that the premium will be much higher in the case of NBFCs than banks, since the latter are more strictly monitored.