The Hindu Business Line : Allow Indian ship owners to insure abroad: Panel

According to the Expert Group set up by the Shipping Ministry, permitting domestic shipping industry to place its marine insurance in overseas markets will give Indian companies a chance to negotiate the best possible terms and become more cost-effective. De-tariffing the marine insurance sector will provide for meaningful and realistic commercial negotiations between the insurers and the insured.

AN EXPERT Group set up by the Shipping Ministry to study the gamut of issues relating to marine insurance favours allowing Indian ship-owners and operators to insure abroad and to de-tariff the sector.

Permitting the domestic shipping industry to place its marine insurance in overseas markets, the Group felt, will give Indian companies a chance to negotiate the best possible terms, based on their individual strengths, and become more cost-effective.

De-tariffing the marine insurance sector will provide for meaningful and realistic commercial negotiations between the insurers and the insured, facilitating commercial adjustment of premium rates on reasonable factors, the Export Group comprising officials of the Shipping Ministry and industry representatives said in a report finalised recently.

Under the extant Indian Insurance Act, domestic ship owners cannot place marine insurance outside India for any type of insurance that is provided by Indian insurers. For instance, the hull and machinery insurance of Indian flag vessels is necessarily to be placed with Indian insurance companies as per Section 25 of the General Insurance Business (Nationalisation) Act, 1972.

sBesides, domestic owners have to insure their war risk cover only with the Government, which operates a scheme called War Risk Insurance on Marine Hulls (1976) through its nationalised insurance companies.

Currently, the Government only permits ship owners to place their Protection and Indemnity (P&I) insurances abroad since this facility is not available in the country.

The shipping industry has for long been complaining about the restrictive laws and cost structure of insurance prevailing in the country. "If the domestic ship owners are to establish the competitiveness of the Indian flag given the global character of shipping, then we should be permitted to tap the opportunities and take advantage of the cost structure available to international shipping companies," an industry official said.

But, as things stand today, Indian shipping companies are not in a position to carry out any commercial negotiations on an on-going basis on premium and vessel ratings.

Domestic ship owners with good track record and those with sizeable fleet have not been able to take advantage of the downswings in the insurance rates prevailing in the international market. Consequently, reduction in operating costs through reduced insurance costs has not been forthcoming, the Group has pointed out.

Until recently, the area of hull and machinery insurance was the exclusive preserve of the four nationalised insurance companies — The New India Assurance Co Ltd, The National Insurance Co Ltd, The Oriental Insurance Co Ltd and The United India Insurance Co Ltd. These four entities, in turn, placed their re-insurance with General Insurance Corporation (GIC).

While the Indian companies retained only a minor share of the risks unto themselves, the majority of the risk was re-insured abroad with the Lloyds of London.

With the liberalisation of the insurance sector, private marine insurers have set up shop in India. But the Tariff Advisory Committee (TAC) continues to determine the premium rates as a tariff item. According to the Group, the vessel ratings suffered from an inflexible tariff structure, putting the premium calculations of Indian shipping companies in a rigid process, mandated by a manual that leaves no scope for addressing prevailing market conditions or international commercial situations.

Besides, the rating structure has remained unchanged since its inception despite the changes that have happened in the shipping industry such as modernisation of vessels, introduction of ISM Code for vessels and better training facilities to crew members, which have reduced the number of claims. Moreover, in the absence of a cut-off period for re-opening of the policy, the premium rates charged for the renewal year are always provisional as they are based on the claims ratio of the preceding five policy years.

The ship owners also have to contend with premium rates for hull and machinery insurance that has no upper ceiling. For vessels that are more than 15 years old, there is no reduction in the H&M premium rate in case of an increase in the insured value of the vessel for the renewal year over the current policy year.

In such cases, the premium prevailing in the current policy year is charged. On the contrary, as per the TAC norms, the H&M rates would go up if there is a decrease in the insured value of such old vessels.

"The premium rates keep on rising due to this stringent procedure over a period of time and there is no scope for reduction in rates unless the claims ratio continues to be below the acceptable limit for the preceding five years," the Group has acknowledged.

Further, the additional premium payable on account of breach of Institute Trading Warranties incorporated in the domestic H&M policies is another area of major concern to the ship owners. In line with the policies issued abroad, if a vessel trades to such areas as Great Lakes in Canada or to Russian ports, it would constitute breach of trading warranty and attract additional premium.

However, there is wide disparity in the level of additional premium charged by the Indian underwriters compared with their foreign counterparts. "Due to this wide disparity, in many cases, foreign time charterers of Indian flag vessels refuse to make full re-imbursement of the additional premium (which they are liable under the charter party) on the grounds that breach of trading warranties attract a much lower premium in the global market."

While the re-insurance market continues to be soft, Indian underwriters do not pass on the benefits of soft market to their clients, a practice that is followed commonly by the foreign underwriters.

The TAC had introduced new guidelines with effect from April 1, 2001 which cover all vessels irrespective of their value. In other words, all vessels irrespective of their value are required to be insured only in India. Moreover, in the revised guidelines, the TAC has neither provided any reduction in rates nor have they commented on the necessity to de-tariff the H&M rates.

The ship owners were forced to insure their high value vessels exceeding Rs 100 crore in the Indian market after GIC raised the retention limit of such vessels regularly when their insurance were placed abroad on facultative basis, where the rates were lower. Since all high-value vessels are to be insured in Indian market only, the benefit of soft rates prevailing overseas were not available to Indian owners, putting them at a disadvantage.

The ship owners are also burdened by other statutory levies such as stamp duty and service tax. The underwriter charges a stamp duty of Rs 0.25 per Rs 1000 of the sum insured every year as well as a service tax at 8 per cent of the premium payable. Both these levies constitute additional costs as compared to insurance placed outside India.

In the wake of the liberalisation of the economy, Indian ship owners no longer enjoy the benefits of a protective environment and have to compete with international lines to do business even within India. One of the ways of improving the profitability of Indian flag ships is to reduce the over heads. "Insurance costs is one of the overheads where there is good scope for reduction in the backdrop of the rates prevailing in the international market," the Group has said.

To achieve this, the Government should review the Merchant Shipping Act, the Insurance Act, the Multi-Modal Transportation of Goods Act and the Forex Manual to bring about necessary amendments and streamline procedures. "This is essential to ensure that the Indian maritime sector is not subjected to restraining procedures and laws that render international participation uncompetitive or cumbersome," the Group said.

The recommendations of the Group assumes significance as the Shipping Secretary, Mr D. T. Joseph, is keen to take up the issue with the Finance Ministry and the IRDA to finalise an actionable policy document on marine insurance.

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