The Hindu Business Line : Spate of calamities may compel insurers to hike premiums

Banglore, Nov. 4 Faced with mounting losses from calamities, domestic insurers are poised to reverse all the large discounts of the last two years and hike premiums.

Since the beginning of this financial year, losses have mounted beginning with the Air India fire incident, floods in central India and the latest being the fire in the Indian Oil Corporation – Jaipur Refinery. Almost all the insurers, sources said, have been hit by the serial disasters with potential impact on their balance sheet. The fear is that the fallout of all these events would result in weakening the solvency margins of all general insurers, if current premiums were allowed to continue.

The sources said asset losses in IOC’s Jaipur refinery fire alone were likely to top Rs 200 crore. ICICI-Lombard General Insurance Company Ltd is the lead insurer for the refinery, with coinsurance pacts with a clutch of both public and private sector insurers. ICICI’s Lombard officials, when contacted, said that the losses from the IOC fire were fully reinsured. The officials said “The effect was not likely to have a significant impact.” Besides, what has also helped insurers to cut losses in IOC fire were the high excesses.

High excesses

Excesses imply the amount of liabilities that the insuree is prepared to absorb or make provisions in the balance sheet. An industry source said that IOC had made provisions in its balance-sheet to absorb up to 25 per cent of the losses. Consequently, this implied that the IOC’s claims on the insurers were also likely to be proportionately lower. However, he admitted, the event was likely to trigger a correction in premiums in the coming months as some risks come for renewal. This was especially in a situation, where fire and engineering premiums have dropped by over 90 per cent after the tariff regime was abandoned in 2007.

The high discounts also slowed the premium accretion growth of the insurers. For the first six months of the current financial year, general insurers’ premiums grew by barely 8 per cent. What was surprising was that the entire private sector grew by only 5 per cent to Rs 6,828.77 crore. Public sector during the same period grew by 10.29 per cent to Rs 9,991.18 crore.

The reduction in premiums also resulted in reduced accretions to the technical reserves. Insurers normally make provisions of up to 50 per cent of their incremental premium as technical reserves — provisions for unexpired losses and IBNR (incurred but not reported) events. With the drop in premiums, the provisions drastically dropped, the sources said. In addition, insurers’ capital through sale of investments was also limited.

Preliminary negotiations

Besides, the sources said that preliminary negotiations for finalising next year’s treaties have begun and foreign reinsures are exerting pressure to push up premiums. This is in view of the rising high claims.

Reinsurers globally have suffered both underwriting as well as investment losses. This would prompt a hike in reinsurance premiums or reduce the number of lines for reinsurance support to domestic insurers through treaties for the next financial year.