Big Insurance Claims in 2008-2009

[v.r.s.nathan]

Insurance firms handing out cheques for the last one year have discovered the grim truth that the 26/11 attack has wiped out almost a third of the money that was pooled in to meet terror claims. Insurers are now uncertain whether the industry will have the wherewithal to absorb the losses if the frequency of terror strikes and subsequent claims increase.

According to GIC Re — the administrator of the insurance industry’s terror pool — total claims on account of the 26/11 terror attacks will add up to around Rs 500 crore. Industry insiders fear property losses could cross Rs 750 crore if one takes into account claims for loss of profits.

Since 9/11, insurance companies started accumulating a special fund to meet terror claims. While there were no major claims between 2001 and October 2008, the industry was shaken by the magnitude of claims that followed 26/11. At present, the corpus of the fund has touched Rs 1,500 crore. With this fund size, the maximum per location cover that insurance companies can offer is Rs 750 crore.

“...It’s difficult for insurers to ascertain whether the Rs 750-crore limit that they have for insuring any terrorist event would be adequate for all scenarios,” SL Mohan, secretary general of General Insurance Council — an association of non-life insurers — told ET. “Just as nobody imagined that 9/11 could happen, it is very difficult to visualise what would be the modus operandi of terrorists,” he said.

Terror strikes have upturned some of the time-tested methods of insurers. All prevalent models for risk assessment are futile in computing terror covers and the industry is yet to invent one. For instance, when it comes to insuring large risks such as oil refineries, insurance companies have models that simulate a vapour cloud explosion to get an estimate of the probable maximum loss.

But in the case of terror events, Indian insurers are clueless in the absence of such standard procedures. While local insurers will find a way to absorb a combined loss of Rs 500-700 crore, 26/11 has exposed the vulnerability of corporate balance sheets to such claims. Since Rs 750 crore is the maximum that insurers will cover per location any loss beyond this will have to borne by the clients or through a high-cost reinsurance plan.

Till now, GIC Re has paid out claims amounting to Rs 197 crore to Taj and Trident. “In terms of capacity we are in the same position that we were before the attacks,” said a senior official of a non-life firm. Until 2001, losses caused by terrorism were covered under regular policies.

But after 9/11, insurance firms worldwide decided to exclude the risks of terrorism from all policies as they suddenly sensed that it was too big to be insured. In India, however, the industry managed to continue to provide terror cover by pooling together their resources to create a virtual fund which was to be used for large claims.

While the terror strikes between 2001 and 2008 caused human casualties, there were no big commercial property losses. This emboldened insurers to bring down the risk premium from 50 paise for ever Rs 1,000 insured to 22 paise. After November 2008, they decided to roll back the rates to 30 paise.

“We do not have details of the number of individuals buying terror cover, but at an industry level the premium has gone up 30%. While of this 20 percentage points would have come from increase in premium the rest would have come from new buyers” said the senior official at GIC.

“It is possible to estimate maximum probable loss in case of terror attacks. However, it’s difficult to assess the probability of such attacks i.e., the frequency and severity of the attacks,” said Praveen Sandri, MD of AIR Worldwide India — a consultancy that specialises in catastrophic risk modelling.

International experts feel that it’s possible for the industry to handle the risk. In a recent paper by the Chartered Insurance Institute London, Raffaello Pantucci from the International Institute for Strategic Studies said that though the threat is real and constant, it is not overwhelming and it is a risk that can be managed through preparedness and vigilance. He has called for a 12-point action plan to manage the risk better.

Source - Economictimes.com

[MTG]

The insurance claims of the three Mumbai hotels — Oberoi, Taj and Trident — damaged in the 26/11 terror attacks, are expected to be settled from the terror insurance pool by March 2010, according to sources in General Insurance Corporation of India.

While nearly Rs 300 crore of claims were yet to be settled, the inflow into the GIC administered terror pool by March was expected to be in the range of Rs 100-150 crore, a senior GIC officer told Business Line.

“We hope to discharge the entire claim amount by March,” he said. The payments, made so far, were on an unaccounted basis and the final amounts were likely to emerge shortly as the hotels were in the final stages of repairs, he added.

“Our total claim outgo of about Rs 200 crore has already been refilled by fresh premium contributions from all the general insurance companies in the last few months,” the officer said.

The new premium contributions during December-March were expected to be nearly Rs 75 crore, he said, adding, “We would also earn interest accruals on deposits of the premium pool and the total inflow by March is expected to be in the range of Rs 100-150 crore.”

Damage estimates

The damages in the 26/11 attack were feared to have wiped out a sizeable chunk of the pool. The total size of the terror pool stands at Rs 1,500 crore as on date. Of the estimated claims of about Rs 500 crore, Rs 15-20 crore would go to the shops damaged inside the hotels. ICICI Lombard had found that one portion of the Nariman House was covered terror insurance policy, but, no claims had been lodged so far, the GIC sources said. Tata AIG, New India Assurance, ICICI Lombard and Iffco-Tokio were the insurers to the three hotels.

While the foreign reinsurance rates for the terror cover had shot up by 30 per cent during the renewal of contract in April this year, the rates were unlikely to change in 2010, the GIC officer said. “The international reinsurance market is unlikely to hike rates next year as there were limited numbers of terror incidents in 2009,” he said.

The insurance companies had hiked terror insurance premiums from 22 paise to 30 paise for a cover of Rs 1,000 after the reinsurance rates jumped in April.

Source - thehindubusinessline.com

[Expert]

The Taj, which was insured by Tata AIG, settled an interim claim amounting to Rs 130 crore as of December 2009. The Oberoi and Trident hotels, insured by New India Assurance, settled claim amounts of Rs 62 crore and Rs 18 crore respectively. According to officials these are only interim payments; the final settlement is yet to be reached, which means that the figure is likely to rise.

Source - economictimes.com