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Tuesday, Sep 20, 2005

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Iran gas pipeline project — Uncertainty over global reinsurers taking up risk cover

C. Shivkumar

None of the domestic insurers currently have the requisite capacities for covering the risks of scale, as measured by the probable maximum loss ratio.

Bangalore , Sept. 19

FACED with reluctance from global reinsurers, setting up the $7-billion gas pipeline from Iran could turn out to be a formidable challenge.

Since the project is transnational, it would have to be backed by global insurers and in turn supported by reinsurers to spread the risk.

Says ICICI Lombard General Insurance Company Ltd's head of reinsurance, Mr Ritesh Kumar, "International capacity will have to be created for this size project due to the cross border logistics and geography involved."

None of the domestic insurers currently have the requisite capacities for covering the risks of scale, as measured by the probable maximum loss (PML) ratio (underwriter's estimate of the cost in the event of a total loss). Even assuming cover on just the property alone, the project's PML estimate would be way above the retention capacities of all the domestic general insurance companies put together.

Moreover the risk cover is expected to be far in excess of the balance sheets of all the four public sector and the 12 private sector insurers put together. The combined net worth (paid up equity plus reserves) of all of them put together is currently estimated at around Rs 15,000 crore (Rs 150 billion or $3.5 billion). Both the sectors conceded that there would be an increase in balance sheet size by 2008.

Yet even after factoring this increase, it would still not be possible to assume the gas pipeline risk or majority risk on to Indian insurers balance sheets. Even assuming a part of the risks on the domestic underwriter's balance sheets would impact the solvency, insurers said.

But other components like liability covers included, the ratios would further escalate. Insurers are not prepared to make estimates, though they concede it would be on the high side.

But Mr Kumar said, "The PML could escalate due to political risks/war like conflicts because of the geography involved."

Essentially this would mean that none of them would be in a position to accept even 10 per cent of the project risk directly on to their respective balance sheets alone or together including that of the national reinsurer.

The option therefore would be look at global reinsurance companies.

Yet global reinsurers themselves are not comfortable with this project.

International insurance brokerage, Howden Insurance Brokers' Vice-President (Reinsurance), Mr Greg Johnson, was blunt.

"An underwriter would look at the relationships between and within the countries involved — a pipeline between Italy and Switzerland would be viewed very differently as to one between India/Pakistan/Iran with internal conflicts possible as well as cross-border," he said.

In such a situation either the premiums would be very high after factoring the potentially high PML or the project would be unreinsurable, industry sources said.

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