Supply disruption covers include conventional force majeure events and extraordinary risks like a possible military intervention in Iran and ensuing contractual defaults.

C. Shivkumar
Anil Sasi

Bangalore/News Delhi, Sept. 27

POTENTIAL users in India of gas through the proposed Iran-India pipeline, mostly power and fertiliser utilities,are now beginning to work out watertight contracts.

Officials of the public sector National Thermal Power Corporation Ltd (NTPC), one of the potentially largest users of gas from the South Paras fields of Iran, said, "The Ministry of Petroleum has assured us that there would be adequate `supply or pay' conditions for ensuring security of gas supply."

Pakistan would be asked to provide sovereign guarantees for ensuring supplies to Indian users, they added.

Extra cover: But users are not convinced these assurances alone would be risk mitigating. This was especially after the US-backed regime in Iraq defaulted in meeting contractual liabilities to the China National Offshore Petroleum Corporation (CNPC). CNPC had transacted an oil equity deal with the Iraq Petroleum Corporation before the US-led military intervention in the region.

Faced with this precedent, users like NTPC and fertiliser companies have indicated that they would scout for additional risk covers from global or domestic insurers in the form of a "Loss of Profit" policy. This is essentially a liability cover, providing insurance cover in the event of the supply disruptions. Supply disruption covers include conventional force majeure events and extraordinary risks like a possible military intervention in Iran and ensuing contractual defaults.

Even these risks would have to be reinsured, given the enormous losses to be covered and the limited capacity of domestic general insurers.

The risks would be far beyond the retention capacities of all the domestic general insurance companies put together.

The combined net worth of all the four public and 12 private sector non-life insurance companies is just about $3.5 billion, excluding that of the national re-insurer, the General Insurance Corporation of India.

Reinsurance uncertainty: If that component is also taken into account the net worth rises to about $5 billion, still substantially short of the risk from `loss of profit' claims from the claimants. Therein lies the rub. Says Mr Greg Johnson, Vice-President (Reinsurance) of one of the world's largest insurance brokerage, Howden Insurance Brokers, "The risk we have here has a combination of size, heavy risk and relatively uncommon elements - all of which will reduce the market supply." Consequently, there is unlikely to be any direct support from either American or West European re-insurers, who traditionally supplement domestic capacities.

This would imply that any such cover would have to be from within the country. In fact, work in this direction has already begun.

Says Mr Ritesh Kumar, Head of reinsurance, ICICI Lombard General Insurance Company Ltd, "In principle, such a cover can be worked out as an extension to the normal property damage/business interruption insurances. "Of course, the coverage would depend on the appetite for this risk of the Indian insurers/foreign re-insurers."

But foreign insurers are likely to support the project despite US opposition.

This is a huge premium flow and foreign insurers want a piece of this action.

Mr Johnson said, "I would say that this is an excellent example where high quality insurance brokers are needed who understand both the internal and external insurance market."

However, a public sector insurer indicated that even if the foreign insurers were not prepared, domestic insurers would rise to the occasion.

"A risk pool could be created. We already had a risk pool for covering terrorism. Something similar could be created."

The costs of that though could be steep, may threaten the economics of the project itself.

(This article was published in the Business Line print edition dated September 28, 2005)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.