“We buy reinsurance based on large risks like fire for a factory or for an aircraft, and so on,” a source said. Each medical or motor vehicle insurance that is written carries no such large risk and, hence, is an attractive portfolio for insurance companies to build up.
Since an individual medical insurance cover is not only minuscule compared to the size of even a small insurance company, and since not all people fall sick at the same time, the losses are never massive. Claims for such business never exceed 65-70 per cent of the total premium secured by a company. Firms, therefore, buy a thin reinsurance cover.
COVID-19 could upend this logic. “Normally, we apply the principle of stop loss in motor and health and buy reinsurance for those accordingly,” the source added. So, an insurance company will top up its usual claim rate with an estimate of outstanding claims on its books to arrive at its maximum liability. This is also known as its stop loss limit. For instance, if the combined total is 130 per cent, the insurance company will buy reinsurance cover to pay (for health or motor business) claims when losses potentially reach say 200 per cent of the premium booked. “Such eventualities are most unlikely,” the source said.
However, as there are no mortality figures to rely on for the new disease, insurers have no data to negotiate the premium to pay for the risk. Reinsurers like Zurich, AIG, and Swiss Re are hamstrung as they have already seen how the disease is making inroads in the balance sheets of European insurance companies.
Indian firms, therefore, have to take on a very high commitment to shoulder the loss (stop loss) or else pay a high reinsurance premium. The result is the same. Yet
they have to offer the cover after the Irdai has instructed companies to cover COVID-19 as part of their insurance plans. Without reinsurance support, the business could become prohibitively expensive.
Also, as the words pandemics and catastrophic losses are out of the pale of reinsurance covers, the chances of buying the cover have further diminished. As the percentage of COVID-19 related hospitalisations increase in India, insurance companies are bracing for its impact on their bottom lines.