The Hindu Business Line : Insurers wary of US sub-prime woes’ impact

Spin-off effect
Up to 30 per cent of the public sector insurers’ and 55 per cent of private players’ liabilities are reinsured with global insurers.
AIG is expected to take a hit of $10 billion.
GIC provides some comfort with its $1.7-b net worth.

C . Shivkumar

Bangalore, Nov. 6 With more casualties coming up in the global sub-prime meltdown, Indian general insurers, both in the public and private sector, are increasingly becoming jittery.

Unlike the banking sector, the insurance sector is far more vulnerable to global capital market meltdowns. Although none of the general insurers invest in foreign capital markets, the vulnerability stems from their reinsurance exposures.

Up to 30 per cent of the public sector insurers’ and 55 per cent of private players’ liabilities are reinsured with global insurers, either through treaties or through the Facultative reinsurance (A reinsurance arrangement by which individual risks are offered by the ceding insurer to a reinsurer who has the right to accept or reject each risk).

After Merrill Lynch and the Citigroup, the expected casualties include the world’s largest insurer, American Insurance Group (AIG). US analysts have indicated AIG’s hit is expected to be close to $10 billion.

With these kinds of numbers seeping in, there are fears are that the negotiations for next year’s reinsurance treaty programme would be hit. Insurers are expected to finalise their respective reinsurance programmes at least 45 days before the conclusion of their next financial year under the guidelines of Insurance Regulatory and Development Authority (IRDA).

‘Fallout limited’

The United India General Insurance Company’s General Manager, (Reinsurance), Mr Harsh Vardhan, said, “We are observing the situation now. The fallout on Indian insurers is not likely to be very significant.”

This optimism, however, stems from the fact on account of the substantial domestic reinsurance capacity is available from the national reinsurer, General Insurance Corporation (GIC). GIC has a net worth equivalent to Rs 6,500 crore ($ 1.7 billion).

But this year onwards, GIC has already pared its statutory reinsurance to just 15 per cent from 20 per cent last year. From the next financial year onwards, the statutory component would be further reduced to just 10 per cent.

This would imply that the domestic primary insurers would have to look for capacities outside the statutory route that would include cross border sources from global reinsurers.

Scale is concern

Says Mr Rahul Agarwal, Optima Risk and Insurance Management Director “ Some hardening is inevitable if reinsurers have taken capital losses on the US sub-prime melt down.”

However, he said the flip side was that few of the insurers have taken losses in Asian markets such as India. Conventional practice among insurers and reinsurers was to compensate for losses in investments through premium hikes and vice versa.

But industry sources said that that was the meltdown itself that was worrying. It was the scale –– the larger the impact, the steeper the rate hikes.

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