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Tuesday, Jun 29, 2004

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Corporates prefer plain cover for terror risks

C. Shivkumar

Bangalore , June 28

HERE is a reason for equity investors to be concerned. Corporate India is not fully covered against terrorism related risks.

In fact, most corporates obsessed with bottomlines preferred plain vanilla covers. Only public sector companies have taken covers against terrorism related risks, sources said. These include the refinery, power, shipping and port sectors.

The Managing Director of Tata AIG General Insurance Company Ltd, Mr Dalip Verma, said, "There is resistance against taking terrorism covers and this is a matter of concern." Terrorism risks, which include both property and liabilities, are covered up to Rs 200 crore within the country. Risk coverage beyond this amount would entail higher premiums or would have to be taken outside the country where coverage up to Rs 500 crore was available.

The sources said that corporate resistance was also despite fall in insurance premiums for some of the liability/ property covers. This was especially in case of covers, which are reinsurance driven. The sources said that corporate reluctance to insurance coverage stemmed from competitive pressures in the market. As a result, some of the corporates were reluctant to pass on the escalated insurance costs directly on to the end customers. Besides, most corporates have taken the view that assets outside the Jammu & Kashmir zone were unlikely to impacted.

Further, the sources said, the fear was that the additional covers would affect the net profits if absorbed into their balance sheets. This was because such increased premiums costs would result in hiking the expenditure and shrinking their net profits, pushing down the earnings per share. Most corporates are extremely sensitive about this figure since it reflects on their equity prices in the market. These reasons apart, the sources said, that some of them also saw few tax benefits for taking such large risk covers.

Yet private sector corporates were not alone in being exposed to terrorism related risks. Few State Government-owned utilities are also not keen on taking this cover. Almost all the hydro electric, thermal and irrigation assets, all which come under the State sector, are uncovered.

Insurance coverage of the assets was confined to only some minimal risks, which include fire or engineering. Even in these cases, only projects supported by multilateral or financial institutions and banks were covered, the sources said. This was because of insistence from the project lenders.

However, wherever loans were fully repaid, the sources said that the State Governments preferred the option of leaving the assets uncovered. The rationale for leaving the assets uncovered was driven by the necessity to keep tariffs down. This was particularly in the case of State-owned power utilities, where tariff pass through of insurance premium was capped at 2.5 per cent of the operation and maintenance costs.

Accordingly, most utilities preferred to maximise their returns by leaving the risks uncovered. This meant that while the utilities were recovering up to 2.5 per cent from the power tariffs, though the asset itself was left uncovered, the sources said.

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