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C.R. Sukumar

Hyderabad , March 8

GENERAL Insurance Corporation of India (GIC), the sole national reinsurer, perceives itself as "caught in a cleft stick" and "sitting on a silent volcano" in respect of its exposure on various risks.

The corporation strongly feels the only solution to this "explosive, tinder-dry, extremely delicate situation" is to form an exclusive market pool for earthquake covers.

According to the GIC Managing Director, Mr P.B. Ramanujam, with India being seismic-prone, forming such a market pool for earthquake covers would ensure that corporate houses were not deprived of earthquake covers.

"It also means that GIC is also spared of exposures to the hazards of facing a holocaust and, thereby, the mortification of not being able to settle claims," he said in an IRDA communique circulated to insurance players.

On GIC's exposure on various risks, Mr Ramanujam said, under obligatory cessions, the corporation accepts 20 per cent of each and every policy issued by direct insurers, subject to certain quantum restrictions in the case of fire, hull and engineering policies. The accumulations could be stupendous under this arrangement.

GIC has been participating in surplus treaties of companies and also in market-surplus treaties at various levels and percentages, which adds to the exposure profiles of the corporation.

Further, for large corporates and peak risks, GIC has been granting reinsurance facultative covers even under non-tariff policies for the simple reason that direct insurers cannot afford the price of reinsurance protection, especially for earthquake, from abroad.

Citing a typical example, Mr Ramanujam said in the mega-petrochemical policies of one unit alone, GIC's total exposure would be around 70 per cent of Rs 26,000 crore (Rs 21,000 crore in property and Rs 5,000 crore on loss of profit). "If an earthquake should occur in the area where the petrochemical factory is located, not only will GIC have to pay 70 per cent of Rs 26,000 crore, but it would also incur losses on its other exposures in that locality which are placed with GIC under obligatory and treaty cessions," he said.

He opined that forming an earthquake pool would eventually result in several distinct and tangible advantages. Despite non-availability of reinsurance protection, direct insurers would continue to enjoy the benefit of insurance protection though subject to certain limitations. The insurance companies, especially the smaller and younger ones, could continue to offer this cover to the insured while, at the same time, not being exposed to the disastrous consequences.

Further, Mr Ramanujam said the pool would considerably lighten the burden in as much as the national reinsurer can participate as well as manage this collectivisation process on a market basis. In view of the pooling facility, reinsurance protection on Excess of Loss basis might be available at higher levels rather than GIC obtaining protection at the individual level.

However, on the pool formation, he stressed certain protections and facilitations. The tariff must be suitably amended to put an overall cap while granting covers to the direct insurance covers. GIC can participate therein to the extent of say, 30 per cent, apart from acting as its Manager. Catastrophe (Cat) reserves must be created and they should have a tax benefit. Investments made out of pool funds should have tax exemptions. Further, in respect of income and capital gains, the methodology of utilisation of Cat reserves, the manner/quantum/time, etc., have to be exclusively laid down by the insurance regulator, the Managing Director said.

More Stories on : General Insurance | Natural Calamities

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