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Irda may allow insurers to fix flexible tariffs

Freny Patel

The Insurance Regulatory and Development Authority will allow insurers flexibility in building tariffs as new projects and companies enter the country. Thus, the Tariff Advisory Committee will acquire greater importance in the new environment, according to P S Shanmukham, former general manager of General Insurance Corporation of India and ex-secretary of TAC.

"Tariffs will not be a hindrance as the regulator will allow risk companies to build around the tariff rates," said Shanmukham.

There will be no more free lunches as insurers have the option to deny cover to highly risky sectors. New insurance companies would set standards in keeping with their experience in overseas markets. The first to be hit will be those dealing in halogen derivatives such as fluorine, iodine and bromine that are toxic.

In the US, insurers have collectively decided against insuring any tyre manufacturing outfit due to the use of carbon black -- a highly polluting material. Tyre companies have thus been forced to shift operations to third-world countries or where pollution standards are not as stringent.

Said Shanmukham: "The role of a risk manager in a corporate will become crucial to make sure that the company adheres to all disaster management and environment safety policies."

More than 50 per cent of Indian insurance business of non-life companies comes from corporates. However, India Inc is failing to insure risks adequately or pay attention to disaster management planning, said Shanmukham.

A leading Indian chemical company took a hit of Rs 400 million when its insurance manager failed to take adequate cover in an effort to save on the premium. The chemical major took a loss of profits policy with an indemnity period of six months. When a fire broke out the company was forced to shut operations for nine months, ending up with a loss of Rs 400 million, for trying to save less than one-hundredth of the cost.

Against the present annual premium income of Rs 100 billion, growing at 10 per cent annually, Shanmukham said the actual premium income ought to be at least 100 per cent more at Rs 200 billion.

The risk manager's role will assume greater importance in such an eventuality of insurers forming cartels against corporate entities. The IRDA however, is expected to take steps to rule out cartel formation. With the TAC formulating the floor price, however, it will be possible to have situations where prices increase in keeping with the risk perception.

Tariffs will only form the minimum floor for pricing risks as private insurance companies bring in their global experience. "Tariff is not just the pricing aspect, but also applies to the terms and conditions of risk covers," Shanmukham said.

Most corporates take insurance cover to the extent of loans taken from institutions and banks, which insist on risk covers. This is not in keeping with the value of the asset. In the case of any loss, the claim amount would be limited to the size of the loan, and not the value of the asset, said Shanmukham.

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