The Hindu Business Line : Tsunami may hit non-life insurers

THE tsunami strike on the Indian coastline is expected to severely knock the bottomlines of all the domestic non-life insurers, both in the public and private sectors.

Sources said that the calamity would spark off a series of claims on property damage, liabilities and personal accidents. A majority of the coastal fishermen are partly covered by liability and property covers. No estimates have so far been made, the sources said, nobody was prepared to mention figures. But all the four public sector insurers are already on the alert to meet settlements as and when the claims are made.

The sources said that the settlements would result in escalating the claims ratios of all the insurers. Only parts of the insurance, especially property and some liabilities, were reinsured. The remaining parts of the claims, especially claims from vehicle owners, would have to be absorbed by the insurers themselves, the sources added.

This year, most of the insurers had hoped to contain underwriting losses to 100 per cent. This was because the year had so far been free of natural calamities. However, the tsunami will result in pushing up the ratios to about 125 per cent.

The sources said that wherever there were no provisions, especially in the case of liability-driven covers, insurers would have to sell some of their investments — both equity and Government securities. In fact, this year, insurers have been on a roll, especially since their equity investments valued on the basis of acquisition costs or face values have considerably appreciated.

But the major worry, the sources said, was the impact on reinsurance negotiations. Under current guidelines of the Insurance Regulatory and Development Authority, reinsurance treaties are expected to finalise at least 45 days before the beginning of the next financial year. With most of the past liabilities of the major foreign reinsurers fully amortised, insurers anticipated more favourable treaty arrangements.

In fact, some time ago, Mr H. S. Wadhwa, Chairman and Managing Director of the country's largest non-life insurer, National Insurance Company Ltd, said, "Reinsurance treaties should be favourable on the basis of developments in the aviation risk markets."

Aviation risk insurance is traditionally done on a facultative basis (a reinsurance arrangement by which individual risks are offered by the ceding insurer to a reinsurer, who has the right (faculty) to accept or reject each risk). These rates have softened from a peak of 0.5 per cent post-9/11 to about 0.04 per cent currently.

However, insurers said that the events of Sunday were unlikely to alter the risk perception completely. Instead of downgrading the probable maximum loss (PML) ratios, the sources said, reinsurers were, in fact, likely to retain it at current levels, especially in the case of liability-driven covers. PML ratios reflect the maximum liability an insurer is likely to face in the event of claims being invoked.

Alternatively, the sources said, the primary insurers would have to work out the excess of loss reinsurance arrangements. This arrangement implied that any loss in excess of the primary insurers' retention would be passed on to the reinsurer. But the flip side was that if there was no change in the PML ratios, even these costs were likely to come under pressure, the sources said.

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