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IRDA awaits exemption on 'calamity reserves'

In the wake of two major calamities last fiscal, Insurance Regulatory and Development Authority is likely to ask general insurance companies to keep a portion of profits as "catastrophe reserve" which would be exempted from tax.

"We are actively taking up this issue with the government. We hope something would come up this fiscal," IRDA chairman N Rangachary said in New Delhi.

Insurance companies had agreed to keep aside a portion of their profits as "catastrophe reserves" on conditions that they get tax exemptions for that portion of profits.

"We have forwarded the proposal to Central Board of Direct Taxes," Rangachary said.

He declined to give the amount of reserve that would be kept for catastrophes saying "it will be fixed after we receive 'in principle' permission."

Industry sources said the amount could be between 2-3 per cent of profits. Worldwide, catastrophe reserves are maintained by insurers within the range of 0.5-5.0 per cent depending on the geographical and other risk-prone factors, they said.

The proposal of maintaining a catastrohpe reserve by general insurers was mooted last fiscal itself after the Gujarat earthquake that inflicted a damage of about Rs 200 billion, of which hardly 10 per cent of properties were insured.

Although the general insurance companies settled claims of more than Rs 10 billion, the absence of a reserve for this purpose had increased their underwriting losses.

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