Japan's earthquake and tsunami on 11 March will have a ripple effect on Indian companies, which may have to pay more for insurance cover against so-called "acts of God" or natural calamities as reinsurance charges surge. Domestic insurers are negotiating hard against a rise in charges as treaties with global reinsurers come up for renewal in the next 48 hours. "A 10% rise in reinsurance cost is likely in the non-proportional component of the treaties with global reinsurers. We expect a 5-10% immediate increase in premium," said G. Srinivasan, chairman and managing director (CMD) of United India Insurance Co. Ltd. About 20% of the state-owned, non-life insurer's book is covered by reinsurance. The premium will rise 10-15% for non-proportional treaties related to catastrophic events, said Shashwat Sharma, director (advisory services) at audit and consulting firm KPMG.
In a proportional agreement, the reinsurer pays for losses in the same proportion as the amount of premium it receives. In a non-proportional agreement, a threshold is fixed and the reinsurer needs to pay only when the claim amount is greater than the threshold. Though the exact extent of losses in Japan is yet to be estimated, the liabilities on the country's non-life insurers' books and global reinsurance companies such as Munich Re and Swiss Re are increasing. Munich Re and Swiss Re renew about two-thirds of their annual property and casualty treaties with non-life insurers of various nations in January, and the remainder in April and July.
The 1 April renewals typically focus on the Asia-Pacific region. The reinsurance programmes of Indian insurers start on 1 April, and within a month every insurer is required to file a copy of their reinsurance treaty for the year with the Insurance Regulatory and Development Authority. A reinsurer, in return for a premium, indemnifies another person or company for a portion of the entire liability assumed by an insurance firm by selling a cover. Reinsurance primarily deals with catastrophe risks-unpredictable, and the greatest risk to insurers. General Insurance Corp. of India (GIC) is the only domestic reinsurer. The global reinsurers have exposure in India through treaties with domestic non-life insurers. There are 24 non-life insurers in India and the present size of the industry is estimated at Rs. 42,000 crore. These insurers provide cover against fire and engineering losses for the property of Indian firms.
These losses can be caused by human error or calamities such as floods, earthquakes and tsunamis. Typically, in a treaty, participants follow rates set by the lead reinsurer. For medium-type risks, where the liabilities are below Rs. 1,000 crore, reinsurers have a 70% share. For bigger risks, 90% is taken by reinsurers. "It's unfortunate that the Japan event has occurred at a time when Indian treaties are due to be signed. There may be a 3-5% increase in the cost for reinsurance on catastrophe covers," said Yogesh Lohiya, CMD of GIC. According to K.G. Krishnamoorthy Rao, MD and chief executive (CEO) of Future Generali India Insurance Co. Ltd, reinsurance rates may rise 15-20% for catastrophe cover. Recent natural disasters such as the earthquake in New Zealand and floods in Australia did not prompt a review in reinsurance rates because there was enough excess capital to cover the damage.
The overall damage from the earthquake and tsunami is as much as 25 trillion yen (Rs 14 trillion), almost four times that caused by Hurricane Katrina in the US, Japan's government estimated on 23 March. The Japanese disaster has forced global reinsurers to increase charges by at least 10% while renewing treaties. Indian firms have already seen a 5-10% rise in insurance premiums in the past few years as the general insurers have been moving to a better pricing model to prevent losses due to price wars and high claims they have been facing in a de-tariffed regime. This rise in premiums, combined with a further 10% rise on account of higher reinsurance cost, may force Indian firms to shell out up to 20% higher premiums for securing cover in fiscal 2012 for industries, projects, properties, plants and workers.
"We'll come to know about any hike in rates when our policies are due for renewal," said S.K. Joshi, director (finance) at Bharat Petroleum Corp. Ltd. "Insurance rates are a function of supply and demand. In the past also, when emergencies occurred, rates have been influenced accordingly." There may not be any immediate impact on premiums for some treaties as the terms have already been finalized, said Rao. "But they may increase by 20% next year. For insurance cover provided to the companies, 20-25% of the total cover is given on acts of God," he said. Claims ratios in these policies are currently in the range of 70-80%. Dinyar Jivaasha, group global head and senior vice-president (corporate risk and insurance management) at Essar Group, said: "We are lucky that we renewed most of our insurance around 31 January.
But those who had not renewed their policies before the crisis may have to pay an additional 10-15% premium." According to Vijay Pawar, CEO and executive director of Reliance General Insurance Co. Ltd, if losses in Japan top $20 billion (Rs 89,400 crore), there will be an impact on the reinsurance cost. "Our main support is GIC and we will understand the impact only after 1 April," he said. Air India, the largest buyer of non-life insurance policies in India, has a total exposure of $8.5 billion for risks perceived on its fleet of 145 aircraft. ICICI Lombard General Insurance Co. Ltd is the major non-life insurer for Air India. Another major domestic buyer of non-life insurance is Oil and Natural Gas Corp. Ltd (ONGC). It takes an insurance package for offshore operations which is reinsured in London. The total asset value to be insured for 2012 is $27.56 billion and the premium for all ONGC operations is about $45 million, said an official who did not want to be named. ONGC is insured by a consortium led by United India. "About 10% of the risk is held by the consortium and 90% is transferred for reinsurance in the London market," said the official.
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