The Hindu Business Line : Terror risk premia sharply down

In a circular issued to all the non-life insurers in the country, the Tariff Advisory Committee of the Insurance Regulatory and Development Authority (IRDA) reduced the premium from 0.05 per cent per mille (50 paise per Rs 1000 of sum assured) to 0.03 (30 paise per Rs 1000). This is the first reduction after 9/11, 2001, when premiums were hiked.

Along with the premium reductions, the ceilings on terrorism risk liabilities were also raised to Rs 500 crore, up from Rs 300 crore.

The changes are to take effect from February 2005 onwards. Already in anticipation of this reduction, insurers have begun reducing their premiums for industrial risk policies that included terrorism covers. These are for covers maturing this year-end.

Mr V. S. Chopra, General Manager, United India Insurance Company Ltd, said, " Some reduction will take place in risk premia for policies coming up for renewals."

Industry sources said that reduction in the premia was partly driven by the low claims ratios in terrorism insurance.

In fact, very few corporates in the country have made claims on terrorism-related liabilities.

The sources said that the reduction was also driven by the reduced risk perception of the global re-insurers due to terrorism risks. This was especially after the US involvement in Iraq.

The result of this involvement, the sources said, was a drastic fall in re-insurance premia worldwide.

The sources said that the facultative risk covers, inclusive of terrorism liabilities in aviation, were now available at rates as low as 0.025 per cent per mille (25 paise per Rs 1000 of sum assured), which is down from a peak of almost 0.1 per cent per mille (Re 1 per Rs 1000 assured) as early as in September 2003.

Moreover, with the premiums kept high on the terrorism risks, most corporates excluded terrorism risk from their insurance policies.

Corporates, especially power utilities, were reluctant to take terrorism covers. The few corporates that had accepted inclusion of terrorism cover into their insurance covers included petroleum refiners and some ports.

Power utilities' reluctance to take terrorism cover was partly driven by the potential adverse impact on their bottom lines.

Insurance costs of power utilities are restricted to 2.5 per cent of the operation and maintenance costs.

Consequently, taking terrorism risk implied that the costs of the high premiums would have to be treated as additional expenditure, with the concomitant impact on the rates of return (RoR).

Few power utilities, especially independent power producers, were prepared to accept this RoR reduction.

Moreover, domestic insurers were also not very enthusiastic on selling such terrorism risk covers.

This was partly because of the steep re-insurance premia and tight caps on maximum re-insurance liabilities. Re-insurers had capped their liabilities to a maximum of Rs 200 crore.

Besides, re-insurers in 2002 and 2003 were not willing to accept terrorism as part of the treaty arrangements.

As a result, most of the domestic non-life insurers had to pool their risks or take re-insurance on a facultative basis, which were prohibitively expensive.

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