Money & Banking

Insurers likely to witness spike in claims from commercial businesses in FY21

Shobha Roy Kolkata | Updated on July 17, 2020


Insurance companies are likely to witness a spike in claims from the commercial business this fiscal, primarily from fire and related accidents in plants and stocks in godowns. The increase in claims could be primarily because of the lack of maintenance in factories and plants, which have been shut for a long time due to the lockdown in the wake of the Covid-19 pandemic across the country.

Moral hazard

According to industry experts, insurers typically witness a spike in claims from commercial business when there is an economic slowdown. While lack of maintenance could be one of the reasons for the rise in accidents, however, the possibility of a ‘moral hazard’ (where the owner or promoter himself sets the plant or godown on fire to raise claims), cannot be completely ruled out.

“When economy slows down there is a spike in claims. While on one hand the incident could have been caused due to a genuine lack of maintenance or less focus on risk management due to tough economic situation, on the other hand, there is the possibility that there could be certain amount of moral hazard. It is difficult to distinguish the two but we always check,” Sanjay Datta, Chief Underwriting, Claims & Reinsurance, ICICI Lombard General Insurance, told BusinessLine.

Higher premiums

Fire accounts for the largest chunk in the commercial business. As on March 2020, the non-life insurance industry witnessed a 35 per cent growth in premium collections from fire at around ₹15,800 crore on the back of a near 25 per cent hike in fire insurance rates mandated by the General Insurance Corporation of India.

According to Rajive Kumaraswami, MD and CEO, Magma HDI General Insurance, while the price hike last year was undertaken in certain identified occupancies, the rates are expected to be at least 25 to 30 per cent higher across the segment this year. This would push up premium collections to close to ₹20,000 crore by FY21.

While the overall premium collections from fire are likely to be higher mainly because of the price hike, the risk loss will also be “huge”.

As per estimates, India has witnessed close to 35 to 40 instances of industrial mishaps as factories resumed operations after more than a month of nationwide lockdown. A majority of these incidents happened at chemical and textile units and shopping malls, among others.

“While the price hike on fire insurance would bring in some benefits, however, based on early trends, there is a feeling that the risk loss is going to be huge. A lot will depend on how well an insurer is able to assess the underlying risk,” said Kumaraswami.

Lack of skilled manpower

Apart from the fact that there is expected to be some ‘deterioration’ due to lack of maintenance at plants due to the lockdown and cash flow issues, the availability of skilled manpower to run and supervise these plants could also pose elevated risks.

“There is an absolute shortage of skilled labourers, and that is going to heighten risk and those risks will cause some accidents. Some of the recent mishaps that have happened could well be because there was no adequate availability of skilled labourers and they must have tried to restart the plant without following the standard operating procedure. This is a clear danger,” said P Nandgopal, Founder and Chief Mentor, Insurance Inbox.

Nandgopal also feels there is also a risk of moral hazard.

“Having worked in the insurance industry for so many years, I have seen that if people are pushed to the wall they try to take advantage,” he said.

Impact on business

The rise in claims is likely to hit insurance companies hard, particularly at a time like this when the overall growth in business has been slow. As per IRDAI data, the gross direct premium underwritten by general insurance companies up to June 2020 decreased by nearly four per cent to ₹39,330 crore (₹41,072 crore).

“Current run rate of business of insurance companies has taken a hit. If your run rate is higher and you are continuously earning money in new business, then your ability to finance your old claims is better, but your run rate has come down and your expenses continue to remain the same, and then suddenly you have the issue of heightened claims then it could pose some problems,” said Nandgopal.

Insurance companies have to explore the possibility of digitising their operations, reducing their administrative costs so as to be able to tide over the crisis, he added.

Published on July 17, 2020

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