Political risk may impact FDI

"With the ever persisting war threat from its neighbour, India is facing a major political risk and foreign direct investment entering into the country is opting to hedge against the risk," said G V Rao, the former CMD of Oriental Insurance Company.

Many of the business process outsourcing units being set up by the foreign firms were going for political insurance cover, he cited an example. There is only one other country which faces the same level of political risk, and that is South Korea with its continuing conflict with the other Korea, he said at a CII seminar on Insurance for Infrastructure, in Hyderabad on Wednesday.

Financiers in the developed countries assess not only the risk factors inherent in a project in the physical terms but also from the angle of the ability of the parties to pay back the installments and political risks both during the construction stage as well as the operational stage, he said.

The whole gamut of insurance covers abroad is financier-driven and it is the financier who retains the services of the insurance brokers to advise him on the risk exposures, he explained.

Talking about the role of the principal, Rao said that organisations should ensure that different wings of a project be insured with a single insurer instead of going for different insurers. They should not allow each contractor or sub-contractor to insure with insurers of their choice, he warned.

Machiraju Appa Rao, the director of International Institute for Insurance and Finance, said that the vast market potential for insurance in the country can not be tapped with the existing intermediary system.

Efforts must be made to equip the intermediaries in knowledge-based selling skills and simultaneously promote awareness programmes for public, he felt.

Allocation of insurance capital to infrastructure development up to a specified per centage (currently capped at 15 per cent) limits the resources available unless more and more premium income is generated through selling of long-term whole-life, endowment plans, pension and annuities, he said.

Capital formation through insurance companies depends upon the efficiency of the sales force and professional approaches in marketing, he reminded.

Other speakers at the seminar included M Gopalakrishna, chairman of APSFC; Aroop Chaterjee, deputy director of IRDA; V R Dutta, head of risk management at Iffco Tokio; D Ravi Shankar, CFO of Crisil; R Raman, vice-president of Tata AIG; P Balasubramaniam, vice-president of ICICI Lombard and Anil Verma, regional manager of Bajaj Allianz.