A three times increase in the cost of insuring power projects has irked thermal power generation companies. The higher cost of insurance is being attributed to a February circular by the General Insurance Corporation of India (GIC).
In a letter written last week to the Ministry of Power, the Association of Power Producers (APP) said, “Due to the new GIC Re circular, the insurance premiums for power plants, say of 1,000-MW unit size, have significantly increased…The increase has been over 200 per cent which is against the basic principle of insurance.”
GIC Re is the country’s largest reinsurer. It has a treaty with insurance companies that allows the pooling of capital by various reinsurers to provide reinsurance support. The February circular said the insurers who want to get the benefit of the treaty will have to quote higher premium rates from March 1 for providing cover to companies in eight sectors that report higher claims.
These are manufacturing rubber goods, plastics, textiles, chemical manufacturing below 32 degrees centigrade flashpoint, transporters’ godowns, steel plants and thermal power plants.
According to the APP, the premium for insuring a 1,000 MW power plant for an assured sum of ₹6,000 crore was ₹2.60 crore in 2018-2019. This has now increased 199 per cent to ₹7.77 crore.
“This sum assured includes huge coverage of high severity and low frequency outcomes such as Fire Loss of Profit (FLOP) and Machinery Loss of Profit (MLOP). It is important to note that premium for such losses which are catastrophic in nature and low probability of occurrence needs to be smoothened over a period of 10-15 years rather than being levied abruptly for a sector that is strained already. A gradual increase of 30-40 per cent over a 5-year period may be more reasonable and easily acceptable,” the association said.
There is also a ‘drastic’ revision in the deductibles, according to the APP.
“The material damage deductible has increased 150 per cent from ₹50 lakh to ₹1.25 crore. The business interruption deductible would be ₹100 crore in 2019 from ₹42 crore in 2018 for a 1,000 MW plant (considering ₹1,200 crore of FLOP) in the event of a natural calamity like cyclone as there would be a waiting period of 30 days before the claim is considered,” the APP said.
“The higher insurance costs especially affect the companies with just one or two thermal power projects as their business is dependent only on one asset. This also drives up costs of insuring machinery as the risk perception is higher in the event of an outage,” a power sector official said.