Terrorist risk cover: To be or not to be

Chennai: A question mark hangs over the corporate sector on getting terrorist risk cover from April 2002 onwards. Currently the terrorist risk is covered as a standard peril in fire insurance policies in India.

Following the 9/11 incidents in America and the subsequent attack on Indian parliament, overseas reinsurers are refusing reinsurance of domestic general insurers fire insurance portfolio. Despite such a stance taken by foreign reinsurers, public and private sector general insurers are now covering the terrorist risk after charging a 10-per cent extra on their fire premium rates. Only recently did the fire insurance rates were revised downwards due to a very favourable claims experience. But insurers cannot survive without reinsurance for long, as it is inviting trouble. In fact, in case of major industrial risks, the primary fire insurance policy is driven by reinsurance arrangements.

According to an industry official, all general insurers are discussing the modalities of covering the terrorist risk. "Whether the terrorist cover will be covered only for normal- and medium-sized risks or even for mega industrial risks, should there be a cap on the amount of claim payable due to terrorist damage or should there be a compulsory excess (the minimum loss amount that a policyholder has to forgo in case of a claim) are some of the questions to be answered."

The recent insurers-tariff advisory committee (TAC) meeting ended without taking any decision on the issues. "We will decide before March 2002 so that the policies that come up for renewal in April 2002 are not affected," says a high-ranking government company official.

The other issue that is dogging the industry is the creation of a catastrophe reserve. The centre plans to create the reserve fund with a corpus of around Rs 320 crore out of the contributions from general insurers. The contribution rate is pegged at around 3.5 per cent of their total premium.

Here again several issues are to be considered, like the amount of contribution from each insurer and their eligibility to draw from the fund upon the happening of a catastrophic event. If the contribution to the fund is to be made on the basis of the premium income than the claim from the fund by the insurers logically have to be considered on their contribution ratio. But this arrangement will give the government insurers huge leverage in marketing, as they can claim that they are in a better financial position to settle huge claims.

On the other hand, if insurers are allowed to draw on the basis of a loss amount, then it will be like big insurers subsidising the losses of smaller companies. The other questions to be answered are whether the contribution to the catastrophe reserve will be considered while determining the insurers solvency margin and whether the contribution will be eligible for tax breaks.