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Non-life insurers are betting highly on the Forward Markets Commission (FMC)’s proposed norms relating to commodities trade. According to the norms, warehouse service providers (WSPs) will have to provide full insurance covers to deliverable commodities on futures exchanges.
In draft guidelines issued on August 26, the FMC said WSPs seeking accreditation with the National Multi Commodity Exchange would have to fully cover the value of goods at exchange-approved warehouses for risks such as fires, floods, cyclones, earthquakes, burglaries, thefts, etc.
The WSPs will also need fidelity guarantees and indemnity covers for all stocks deliverable on the exchange. The value of the goods to be insured would be marked-to-market on the replacement value, on an ongoing basis, the FMC said. It sought comments on these guidelines from the public by September 15.
“With the FMC asking WSPs to take insurance cover for their goods, there will be business opportunities for companies such as ours. Since there is always a risk of losing these commodities to fire, flood and other perils, the mandated insurance will lead to additional opportunities for insurers,” said Rakesh Jain, chief executive of Reliance General Insurance.
The insurance coverage for commodities accounts for less than five per cent of the overall business of the non-life insurance sector. Experts said if all WSPs took insurance covers for crops, this might rise to eight per cent in the next six-eight months.
“We have always taken full insurance for the commodities stored with us. Either depositories or owners take full insurance of the value of the commodities, without which we do not issue warehouse receipts, through which depositories can avail of funds from financial institutions,” said Anil Choudhary, managing director of National Bulk Handling Corporation.
Insurers said with frequent price fluctuations, the premium for commodities covers rises/falls 20 per cent, based on the price cycle. For commodities more prone to damage from floods, cyclones, etc, the premium is higher, with the insured sum equal to the value of the goods.
“The premium amount for high-risk commodities such as cotton, which is highly inflammable, is always substantially higher. For commodities stored within factory premises, too, the premium is very high,” Choudhary said.
While both private and public sector general insurers offer covers for commodities, the fidelity guarantee is a new growth area for insurers. Under fidelity guarantee insurance, a company provides to indemnify the insured against a direct pecuniary loss due to frauds, etc. The size of the cover depends on the type of commodity being dealt with.
“Though banks providing finances to WSP usually took insurance covers to protect against losses, those taking financial assistance from other private sources weren’t covered under insurance. With the regulator asking all WSPs to take complete insurance covers, there could be an immediate rise of 15-20 per cent in business, especially for state-owned insurers, as all such providers will have to take a cover to avoid huge liabilities later,” said a senior official with a public sector insurer.
He added initially, packaged policies covering risks to commodities, as well as liability covers to a particular WSP, would be considered.
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