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Friday, Sep 20, 2002

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Almatti power project contract — TAC clarification puts more pressure on pvt insurers

C. Shivkumar


THE bid rankings for the insurance contract of the 290-MW Almatti hydel power project is likely to change following the clarifications given by the Tariff Advisory Committee (TAC). TAC is the tariff-fixing arm of the Insurance Regulatory and Development Authority.

TAC has clarified that volume discounts are not allowable where the risk coverage is less than Rs 100 crore. In fact some of the private sector general insurance companies who had bid for the Almatti project had offered such discounts in the contractor all risk (CAR) cover. The sum insured in the CAR cover is about Rs 78 crore. The total sum insured for Almatti is Rs 429 crore which includes Rs 351 crore for marine risk.

Sources said here that TAC had also clarified that the entire project would have to be taken into account for fixing the premiums. Splitting risks was not allowable under current guidelines, which TAC had communicated to some of the insurers who had sought clarifications.

The companies who had bid for the Rs 694-crore Almatti project promoted by Karnataka Power Corporation Ltd (KPCL) included Bajaj Allianz General Insurance Company Ltd, Iffco-Tokio General Insurance Company Ltd, ICICI-Lombard General Insurance, Reliance General Insurance, Royal Sundaram General Insurance, United India Insurance Company Ltd, New India Assurance Company Ltd and Oriental Insurance Company Ltd.

Industry sources said the TAC clarifications would translate into an additional tariff of Rs 24 lakh over and above what had already been quoted. This in turn translates into changes in the bid rankings.

The lowest bidder, Bajaj Allianz, had quoted Rs 1.56 crore for the insurance contract. An addition of another Rs 24 lakh would mean that the rankings were likely to drop, taking the public sector ahead, they said.

In fact, all contracts for power projects have faced cutthroat competition between the public and private players. Despite this intense competition, Bajaj Alllianz has bagged four contracts for the Raichur thermal stations through aggressive bids.

However, the private sector's ability to assume more risks, especially in big tickets, is now in question. This is because private sector companies are still undercapitalised. Undercapitalisation implies that private sector's ability to absorb claim liabilities is very limited. The capitalisation of a private sector company is only Rs 100 crore. Consequently private sector insurers would have to rely heavily on reinsurance support.

Besides, the ability of overseas partners to bring in more capital is constrained after 9/11 incidents and the recent floods in Europe. In addition, the weakness in the international capital markets has also put pressure on the solvencies of some of the large international companies.

On the other hand, the public sector in the country has an average capitalisation in excess of Rs 3,000 crore. This large capitalisation allows them a greater retention capacity. But insurance seekers like KPCL have expressed helplessness in their ability to discriminate bids on the basis of capitalisation.

" Fixing capitalisation is the function of IRDA and participation in any competitive bidding cannot be discriminated without the regulator saying so,'' Mr Vishuvardan Reddy, Director - Finance of KPCL, said.

The statements notwithstanding, the sources said, there were still considerable doubts about the ability of the private sector to absorb more risks this year.

Such doubts have begun surfacing, especially since some of the private sector companies have begun restricting exposure to some high claim sectors including statutory covers.

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