Financial Daily from THE HINDU group of publications
Wednesday, Jun 05, 2002
Money & Banking
Raichur Unit 5 insurance cover -- United India seeks redressal from tariff advisory panel
BANGLAORE, June 4
THE public sector United India Insurance Company Ltd (UIICL) has moved the Tariff Advisory Committee (TAC) over violations in tariff guidelines in the award of insurance cover for Unit 5 of the 210 MW Raichur Thermal Power Station (RTPS).
The insurance cover has been awarded to another public sector company Oriental Insurance Company Ltd and Bajaj Allianz General Insurance Company Ltd (BAGICL). OICL has been kept as the lead insurer with a 70 per cent share and the remaining share being allotted to BAGICL.
The Karnataka Power Corporation Ltd (KPCL) has preferred to insure all the RTPS units on a reinstatement cost basis in line with current trends. This implies that claims would be payable on the basis of the replacement cost value of the assets. The value of the assets for insurance has been fixed at close to Rs 460 crore. The sources said that for this cover KPCL had to pay a premium of close to Rs 80 lakh for the insurance cover.
The sources said that nine companies had participated in the competitive bidding process. Although in the process, BAGICL and UIICL were among the lowest bidders, KPCL had chosen to award the cover to OICL. KPCL had taken the stand because of an outstanding claim with OICL amounting to close to Rs 5 crore.
UIICL has, however, argued that outstanding claims cannot be applied as criteria for awarding insurance contracts, the sources said. Besides, the sources said, the original quote for insurance cover was made by BAGICL, and OICL was asked to match the same, as a precondition for award of the insurance contract.
There were also other factors that have influenced KPCL's decision to award the lead insurer to the OICL. BAGICL already has three units of the Raichur Thermal station with it.
However, even this low quote is at least 30 per cent higher than last year, industry sources said. This is despite KPCL going through the competitive bidding route. The sources said that the higher costs were entirely due to the hardening of domestic and global insurance markets. Besides, the new cover also includes the revised terrorism risk cover, which caps insurance companies' liabilities to Rs 200 crore per location.
Sources said the tense border situation has also resulted in an escalation of the probable maximum loss ratio by the reinsurers. This is one of the major reasons for the inability of corporates to push down insurance tariffs despite the increase in the number of players.
KPCL, however, will not be in a position to pass on the escalation in insurance cost to the bulk power buyer. The reason for this is, for the current year, the regulatory commission has already frozen power purchase costs.
Moreover, insurance expenditure is treated as part of the fixed costs. Accordingly, loading of insurance to power tariff is restricted to just 2.5 per cent of the operation and maintenance costs.
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