Financial Daily from THE HINDU group of publications
Thursday, Aug 04, 2005
Financial Daily from THE HINDU group of publications Thursday, Aug 04, 2005 |
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Maharashtra Money & Banking - General Insurance Industry & Economy - Natural Calamities Insurers apprehend bigger dent from Mumbai claims — Defaults in Fac Re arrangements seen C. Shivkumar
Bangalore , Aug 3 INUNDATED with large claims, domestic non-life insurers are faced with the prospect of meeting the settlement liabilities directly from their own balance sheets. Sources said that this was because some of the insurers have entered into facultative reinsurance (Fac Re) arrangements with East Asian reinsurers with low ratings from international rating agencies. (Fac Re is an arrangement where individual risks are offered by the ceding insurer to a reinsurer, who has the right to accept or reject each risk.) Defaults have occurred in Fac Re contracts in the past, they saidInsurers fear that some of Fac Re covers would devolve on the primary insurers themselves. The fear of defaults was also on account of the large claims likely from the floods in Maharashtra and Gujarat and the ONGC fire. The normal practice adopted is that the primary general insurers meet upfront the entire claim and reclaim from the reinsurers. In the event of defaults by reinsurers, the sources said, the worst affected would be the smaller private sector insurers who are likely see weakened balance sheets. Public sector capitalisation is currently equivalent to Rs 14,000 crore, whereas that of the entire private sector is less than 10 per cent of that figure. Only in treaty-driven reinsurance, there are no apprehensions of default. All the four public sector companies have treaties with the large international reinsurers. On mega risks, however, the standard adopted for reinsurance is through Fac Re contracts. The sources said that in the case of the ONGC fire, which is treated as a mega risk, the liability was expected to be around Rs 1,000 crore, though only about Rs 60 crore was the retained liability. The remaining amount was entirely reinsured with a clutch of international reinsurers and the General Insurance Corporation of India. The syndicate leader, United India Insurance Company Ltd (UIICL), has apportioned the retained risk through co-insurance among most of the domestic non-life insurers. Consequently, the UIICL's effective liability would be restricted to a small component. But these events, the sources said, were likely to lead to a complete re-evaluation of the probable maximum loss (PML) ratios for the sub-continent by some of the top reinsurers of the world - Munich Re and Swiss Re. This effectively would reverse the trend of softening reinsurance rates and translate into higher tariffs for treaties for the next year.
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