Financial Daily from THE HINDU group of publications
Friday, Sep 09, 2005
Money & Banking
Industry & Economy - Natural Calamities
Katrina effect: Insurance cost for projects set to harden
Bangalore , Sept. 8
HURRICANE Katrina has sent the jitters down the domestic non-life insurance companies who fear a major hardening of the reinsurance markets worldwide.
Industry sources said that non-treaty reinsurances have already hardened in the aftermath of the hurricane. Only treaty-driven reinsurance tariffs are unlikely to be affected this year, they added, since the contracts were already signed in March this year.
Hurricane Katrina is estimated to cost as much as $35 billion for insurers and the bulk of the costs is expected to devolve on to reinsurers worldwide. A significant portion of the losses is estimated from property and liability-driven covers, which include losses to energy equipment due to flooding.
Consequently, insurers said that domestic insurers would now be faced with little choice other than to hike premiums for policies coming up for renewal, especially some of the mega risk covers. Insurers said that only in 2004, reinsurance had begun softening, after most of them recovered from the 9/11 shocks. This time there would likely be an all-round hardening, the sources said. They added that the hardening was on account of the series of natural disasters that have occurred, beginning with the floods in Europe this year.
The immediate impact would be on facultative reinsurance (Fac Re) covers, which are done on a case-to-case basis. (Fac Rse is a reinsurance contract under which the ceding company has the option to cede and the reinsurer has the option to accept or decline individual risks.).
Fac Re covers are now estimated to have hardened to about 0.08 per cent, from about 0.05 per cent. Depending on the extent of the losses, the sources said these rates could move either way. This implied that if the losses were lower than what was originally estimated, rates could actually come down from the present levels, they added.
Yet, there are fears that rates could harden given the magnitude of the losses. This was partly because some of the probable maximum loss ratios are likely to be revisited, especially after the floods in Gujarat and Maharashtra this year and fire at the ONGC rig.
Any hardening at this stage would in turn impact the negotiations for reinsurance treaties expected to begin later this year, the sources added. Treaties for last year and this year were on favourable terms. This year, not many insurers were confident of securing similar terms, they said.
In the event of a hardening of reinsurance covers, most projects in the country, including refineries and oil companies would have to brace themselves for coughing up higher premiums.
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