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Reinsurance rate to remain flat, barring aviation sector

M Saraswathy 

While reinsurance rates for this year are likely to remain flat because no major catastrophic event impacted the books of companies in 2014, some segments such as aviation are expected to see some marginal impact.

In 2014, besides a few aircraft accidents, Malaysian Airlines flight 370 went missing on March 8. It was carrying 12 crew members, all from Malaysia, and 227 passengers from 15 nations, all of whom have been declared dead.

Their nominees are eligible to make claims. At the time of renewal of contracts, the premium is based on the experience of claims. Wherever the claims are high, there is an increase in price.

A senior reinsurance executive said at the time of renewal, a slight hardening in the aviation segment would be seen this year. He added this was not just for India, but for other countries as well.

Airlines that are lost and their debris are also missing are covered under the “disappearance” clause of an aviation policy. companies are liable to pay the full amount under such a policy. However, some local laws do apply in certain cases where the particular country’s government is not part of international agreements for compensation for air-related accidents.

After the government concerned issues the official statement of disappearance, the claims processing begins within the next 48 hours. Claims for Life and property losses have to be paid in full. The lives lost and survivors (if any) are decided on the basis of the official list provided by the airline company.

Most countries follow the Montreal Convention of 1999, which covers norms with respect to carriage of passengers by air. Article 50 of the Montreal Convention says states should make their carriers have adequate covering their liability under this convention.

A carrier may be required by the state in which it operates to furnish evidence that it maintains adequate insurance covering its liability under this Convention. More than 100 countries are party to this convention including China, India and Malaysia.

Even though a country may be a party to the convention, they can follow internal laws for settling claims. However, international carriers follow Montreal Convention norms. If there are any disputes in the size of the claim, an aggrieved party can approach an insurance company who will engage third party surveyors to ascertain the claim-size.

Reinsurance and insurance officials are of the view that the Asian market had been mostly free of such events, barring the Jammu & Kashmir flash floods and the Hudhud cyclone, which had a slight impact on the rates. The Hudhud cyclone, which hit Andhra Pradesh and Odisha, resulted in Rs 3,000-3,200 crore of claims for property and crop damage, while the floods in Jammu & Kashmir saw insurers taking a Rs 3,000-crore hit.

With respect to the air-carrier liability, the Montreal Convention has established a “two-tier” system of liability. As per these rules, a carrier has a minimum liability for damages not exceeding 113,100 Special Drawing Rights or SDRs (where 1 SDR is equal $1.41 or Rs 86.69). So, an air carrier will have to have liability regardless of its fault when it falls within 113,100 SDRs.

Further, for each passenger the carrier may be liable for damages to the extent that they exceed 113,100 SDRs, unless they prove that it was not their fault but that of a third party.

Reinsurance is the insurance taken by insurance companies to mitigate the risks of claims and claim payment brought about by large risks. Here, the reinsurer takes on all or part of the risk covered under a policy of an insurance company in consideration of a premium payment.

Contracts in reinsurance come for renewal on an annual basis. Last year witnessed softening of reinsurance rates in the contracts renewed. According to sources, the rates came down by 15-20 per cent. This was because of absence of major natural catastrophe events across the world and better numbers reported by the sector. Market expansion is also expected, with the insurance ordinance ruling that foreign reinsurers can open branches in India to offer better services.

Reinsurance rates are decided based on domestic as well as global events. A single or group of events happening in a particular country might or might not affect the rates, but a large global catastrophe could impact rates since the reinsurers would have an exposure to those risks.

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First Published: Tue, February 24 2015. 00:25 IST