The refinery, power plant and industrial risks are likely to face steep increases in premiums as insurers pass through the costs of increases in reinsurance tariffs.

C. Shivkumar

Bangalore, Jan. 16

DOMESTIC insurance companies' negotiations with international reinsurers for renewal of treaties have hit a rough patch, with the latter insisting on tightening their limits after last year's flood losses.

High-level sources said that Treaty arrangements with the foreign insurance companies were still in the process of discussions. However, the reinsurers had conveyed that discounts would not be available next year on account of the large claims made by the primary insurers this year.

This implied that the reinsurance tariffs were likely to escalate for catastrophe risk when treaties are finalised for the next financial year. Treaties under the current regulations of the Insurance Regulatory and Development Authority are expected to be finalised 45 days before the conclusion of the financial year.

The preferred foreign insurers include Munich Re, Swiss Re, London Syndicate and Lloyds, which are among the world's largest reinsurance companies.

The sources said that discussions were still under way. But the non-availability of discounts meant premiums were likely to move northwards for asset risk covers. It implied that the primary insurers were likely to earn lower ceding commissions as against the current year. Ceding commission is earned when the risks are passed on to the reinsurers.

Among the covers coming up for renewal are refinery, power plant and industrial risks, all of which are likely to face steep increases in premiums as insurers pass through the costs of increases in reinsurance tariffs. Mr Jitendra Bhagat, Director and Chief Executive Officer of ASL Insurance Brokers Pvt Ltd, "Given the state of claims during the current year, rates can be expected to harden."

The firming in reinsurance was already reflected in the Facultative reinsurance (FAC Re) contracts, the sources said. FAC Re tariffs in the international markets are now about 0.09 per cent, up from about 0.05 per cent during the beginning of this fiscal year. The sources said that rise in premiums were also led by a change in the reinsurers' perception of the probable maximum loss ratios. Barring motor vehicle risks, domestic insurers had taken cover for almost all industrial risks during the current financial year. In addition to the floods, the sources said that the domestic insurers had also made claims on the ONGC fire damages last year.

The sources said that what was also driving up premiums were the losses suffered by the large international insurance companies themselves. Swiss Re and Munich Re had incurred losses to the extent of $3 billion ( $1.2 billion and $1.8 billion) due to the Hurricane Katrina in the US and floods in Europe.

(This article was published in the Business Line print edition dated January 17, 2006)
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