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Thursday, Jun 17, 2004

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Reinsurance premiums may turn soft for power sector

C. Shivkumar

Bangalore , June 16

INSURANCE renewals for the energy sector are expected to become cheaper with the retreat in reinsurance premiums worldwide.

Sources said here that reinsurance rates for the energy sector was down by at least 25 per cent. Currently, premiums ranged about 0.6 per cent of the sum assured for covers driven by facultative reinsurance. Already for aviation sector, reinsurance rates have been dropping during the last few months. One of the major factors that had led to the softening premiums was the changed probable maximum loss clause.

During the last one-year, there have been very little losses on account of natural calamities. As a result the world's largest reinsurers have had a good year and actually converted underwriting into a profitable business. Besides, all the reinsurers have been able to fully absorb the losses incurred as a result of 9/11 events.

Further, the sources said that the softening reinsurance of covers worldwide had led to strange situation where some covers were cheaper directly in the international markets.

For instance, premiums in the domestic markets for terrorism risk up to Rs 200 crore was equivalent to the same premiums for covers up to Rs 500 crore in the international markets, the sources said. But only large value covers are permitted to be accessed directly from the international market.

Besides, new reinsurance capacities have also emerged in Asia, particularly from Japan, the sources said. These reinsurers are in a position only to provide FAC Re contracts, since any treaty arrangements can be taken up only next year. Further treaties are permitted to only reinsurance companies conforming to those have companies who have an acceptable rating.

Asian reinsurers fall within ratings of BBB, implying weak solvency margins as compared to AA reinsurers.

Among the likely beneficiaries of this reduced reinsurance premiums are large independent power producers in the country. Most of them had been forced to absorb the hike directly into their balance sheets, leading to lower returns for the equity holders. Currently, insurance costs pass through is restricted to 2.5 per cent of the operation and maintenance costs.

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