The Hindu Business Line : Surge in purchase of liability cover by IT, BPO entities

PURCHASE of liability insurance cover by information technology companies and business process outsourcing (BPO) entities has surged over the last two years.

Mr Andrew Clarke, Executive Vice-President, Corporate Broking, Aeon Global Insurance Services, said that IT and BPO companies were exposed to an intensely litigious international environment. This was one of the major factors that was driving their purchase of such policies. The insurance placements were entirely made with insurers that had international ratings above `BBB' assigned by globally recognised ratings agencies.

Mr Clarke said that in the past only the large companies took such cover. However, more mid-size companies were also taking cover, as they were driven by the outsourcing revenue models of foreign companies. Among the major risks Indian companies face from these entities are glitches in software products, including deviations from product specifications and issues relating to breach of contractual deadlines. The cover against such risks all constituted liability cover. Consequently, insurers, he said, fixed limits on claims payouts. The costs of excess claims beyond these limits would have to be borne by the companies themselves, he added.

Almost all the domestic insurance companies, both in the public and private sector, currently reinsure the potential liabilities. This was to insulate themselves against large claims and the potential impact of cross-border claims on their respective balance-sheets.

Yet, despite the large demand for such directors' risk covers and increase in claims, premiums on policies have actually dropped, industry sources said.

The drop in premia was on account of the increased business volumes in directors and officers' liability cover, and also because of the systems put in place by some companies to contain potential claims and tight legal disclosure norms. Besides, the intervention of brokers also ensured that primary insurers were in a position to obtain competitive reinsurance cover.

The most important factor was that this particular portfolio had a favourable claims ratio for insurers of less than 30 per cent.

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