Next big reform in Indian insurance will be indemnity cover for shipping

Amendment to have such a facility could be part of new government's early legislative agenda

The Insurance Act will have to be amended to make room for an Indian protection and indemnity facility (P&I) for shipping companies in the country, an expert committee set up by the finance ministry has said.

The Act does not have any provision for entities like mutual insurance associations to operate in the sector. “This (amendment in the Act) also means the new line of business will have to wait for the formation of a new government after the general elections,” said a government source aware of the developments.

Finance Minister Nirmala Sitharaman told a shipping conclave in Mumbai last year that India needs to have a P&I facility, so it is likely that the amendment will be pushed rapidly in the legislative agenda when a new government assumes office. India goes to elections in April and May this year.

The committee, set up under the chairmanship of M P Tangirala, additional secretary in the finance ministry, also plans to reach out to Indian insurance companies to pick capacity in this line of business to make a P&I club a reality in the Indian insurance market. On the question of whether the government will contribute any initial capital in the business, the committee, representatives of various ministries, industry representatives and the sector regulator, Insurance Regulatory and Development Authority of India, will take a call.

"A model the committee could look into is the GIC cargo pool of Rs 500 crore meant to offer cargo insurance for marine voyages of Indian companies importing fertiliser from Russia,” said S Mohan, Director at Insurance Brokers Association of India. The pool, set up in 2022, covers not only fertiliser but also the risks of oil and gas imports. State-owned reinsurer GIC Re holds a 40 per cent share in the pool and other companies in the private and public sectors hold the remaining stakes.

A P&I facility offers shipping companies an insurance cover like the third-party cover given to motor vehicles. Traditionally, a non-life insurance company offers only a cover for the transit of cargo to a transporter. A P&I facility pools in risks from member insurance companies to offer a larger cover for damages to others – it is an arrangement needed if a ship capsizes, spills cargo or collides with another vessel. These are vast sums involved. The London-based International Group of P&I Clubs, for instance, from which more than 90 percent of such cover originates globally, limits the payouts to about $3.1 billion.

A P&I club transfers risks of catastrophes from a single company to a much larger entity. It is not a single insurance underwriting company but a group of insurance companies plus other firms with stakes in this line of business. The stake of each company in the club is determined by the percentage of business it agrees to contribute in the pool. The advantage of this structure is that unlike a company that will have to report to its shareholders, a P&I club is bound to report only to its members comprising of ship owners, operators, charterers, freight forwarders and warehouses. Such an entity can act both as insurance provider as well as receiver for its members.

Given the heightened risks to shipping lines in the current global environment, the Indian government has been pushing to create a domestic P&I club. This has become more necessary as there are also ships touching Indian shores bringing oil and gas from Russia and Iran among others, which are denied such covers by the current P&I clubs. If there is any catastrophe, for instance, the entire cost of those will have to be assumed by the Indian government. While the International Group of P&I Clubs of London is almost like a monopoly bringing together 13 country-based P&I clubs, newcomers are muscling into the business. This includes such associations in both China and Japan where business volumes are building up, though the Japanese entity is the only Asian member of the London Club.

Over the past few years, GIC Re has studied the prospects to guide the government on the feasibility of offering this business from India. A suggestion in this regard is to place the club in the fast-emerging Gift City insurance hub. While this will still need an amendment in the Insurance Act the subsequent steps can be put on the fast track, a source said.

As a trial, India’s largest insurance company by market share, New India Assurance Company has begun to offer a similar but limited cover to coastal shipping vessels. It is expected that this will be the model which will expand over the next few years. Those asking for cover will be the ships with the Indian flag. Of the 1500 odd vessels in the Indian Register of Shipping there are no large ocean-going ones like oil carriers and similar ones. So the scale of risks for the companies that pick up stake in the Indian P&I entity shall also be limited.

The Asian P&I clubs like the Chinese ones were initially backstopped by their governments. “One of the options for the government will be to offer some sort of sovereign guarantee to build volumes in the business” said a source. The capacities which the insurance companies will bring on their own, shall be limited, said the source.