The Hindu Business Line : Corporates may have to pay more for insurance cover

INSURANCE costs for corporates in the country are expected to escalate when premiums come up for renewal for the next financial year. An indication of this trend was available at the bidding for units one and two of the Raichur Thermal Station of Karnataka Power Corporation Ltd (KPCL).

Sources said here that both public and private sector insurance companies had pitched for this contract which has come up for renewal. The companies include United India Insurance Company Ltd (UIICL), Oriental Insurance Company Ltd, New India Assurance Company Ltd, Bajaj Allianz and Royal Sundaram Alliance.

The value of the insurance contract is over Rs 700 crore. The policy coverage includes terrorism risk cover, which is treated as part of the fire risk.

The sources said that Bajaj Alliance had emerged as the lowest bidder with a bid of Rs 1 crore, which is about 67 per cent higher than the last year's quote of Rs 60 lakh. However, the low bid partly stems from some loading elements as fixed by the Tariff Advisory Committee (TAC).

According to the TAC guidelines, insurance tariffs are permitted loading based on the claims experience of the last three years. Since the KPCL had made large claims on these units, the public sector companies had factored these components into their respective bids leading to higher quotes than Bajaj Alliance.

As a result of these elements in the tariff fixing, public sector companies have once again decided to seek the intervention of TAC.

The escalation in premiums, the sources said, was also due to changes in valuation. Traditionally, public sector companies have opted only for the market value method. This method allows for claims settlement on the basis of the depreciated value of the asset. This method was adopted in a bid to keep premium costs low.

However, in assets where the physical asset coverage is with the development financial institutions, the coverage is based on a reinstatement basis. Reinstatement implies that claims settlement would be on the basis of a replacement cost value of the asset.

Most utilities, which have been accessing the financial markets, banks and financial institutions for their funding requirements, have been doing thus by providing physical asset cover. Consequently, creditors have been insisting on changes in the insurance valuation methods from market value to reinstatement, which has pushed up premium costs.

The sources said the hardening of the reinsurance markets was unlikely to impact the KPC bid. This was because in normal fire insurance, 20 per cent is mandatorily reinsured with the domestic reinsurer, GIC. The remaining 80 per cent would be reinsured with the four public sector companies.

This kind of a reinsurance would automatically improve the retention of premiums in the country, they added.

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