Financial Daily from THE HINDU group of publications
Tuesday, Jul 01, 2003
Money & Banking
Foreign reinsurers impose fresh terms
BANGALORE, June 30
REINSURANCE treaty arrangements are in trouble as foreign reinsurers have imposed fresh conditions for honouring their obligations. These treaties are signed between domestic general insurance companies with foreign reinsurers and were finalised before the beginning of the financial year in line with the regulator's guidelines.
Sources said here that two of the globe's larges reinsurance companies, Munich Re and Swiss Re have conveyed to the domestic insurers, that they were not prepared to honour claims on liability risk covers beyond Rs 7 crore. Both these insurers have conveyed that their treaty obligations would apply only to asset risk covers.
Liability covers include policies such as terrorism risk, natural calamities, advance loss of profit, accident claims and consequential liabilities.
Reinsurers have instead advised domestic general insurers to source the spot markets or Facultative Reinsurance (Fac Re) markets for liability risk covers.
This would mean that policies coming up for renewal are likely to face another round of escalations, especially in reinsurance driven covers.
This is because Fac Re tariffs are substantially higher than treaty driven rates.
Reinsurance premiums tariffs are currently in the region of about 1.75 per cent of the sum assured. Estimates are that spot cover tariffs are closer to 2.5 per cent. One major reasons for restricting liability covers stems partly from the low tariffs prevailing in the Indian insurance markets.
Reinsurers early this year had exerted pressure on the Government to completely deregulate insurance tariffs. Reinsurers had taken the stand that domestic insurance tariffs did not reflect international rates, which had been rising since September 11, 2001.
Last year, reinsurers had imposed limits on liability covers, especially seismic and terrorism risks where the overall claims limits were restricted to $150 million and subsequently extended to floods.
The sources said that the provocation for the new restrictions on liability risk covers was due to the large claims made on the insurers due to asbestos damages by various rights groups. These claims were now expected to further damage the reinsurers' balance sheets, which has been knocked by consecutive under writing and investment losses.
Both Swiss Re and Munich Re are large institutional investors in the global equity markets and hold at lest 75 per cent of their investment was in equities. Munich Re in the first quarter of this year has suffered a net loss of Euro 238 million. Swiss Re for the last year had suffered a loss of Swiss Francs 91 million.
Faced with investment losses, the option was to hike under writing tariffs, and restrict liabilities, which is what has been done.
The sources said the withdrawal was also influenced by a reappraisal of the probable maximum liabilities in some of these risks. In fact some of the liability risk covers are already being classified as "uninsurable" the sources said.
Accordingly reinsurers were interested in covering risks only where the PML ratios could be forecast. This was possible in the case of the Asset covers on the basis of the asset values. However, this was impossible in the case of the liability risks, the sources added.
The sources said that this move by the global reinsurers was forcing domestic companies to realign their strategies to restrict underwriting losses. Already private sector insurers have sought reinsurance arrangements with the national re-insurer, General Insurance Corporation, over and above the mandatory limit of 20 per cent, though this has still not been fully conceded by the re-insurer, the sources added.
Moreover, private sector general insurers have also begun attempting to revive the pool arrangement along with the public sector, which are better capitalised.
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