The Telegraph
Since 1st March, 1999
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Spotlight on scrutiny of big risk cover

New Delhi, July 4: Insurance companies are split on the regulator’s decision to seek details about their mega risk policies — a portfolio that has remained outside the pale of regulatory scrutiny until now.

A mega risk policy is one where the threshold limit for the probable maximum loss (PML) is Rs 1,054 crore, or where the sum insured at any one location is above Rs 10,000 crore.

There are approximately 100-120 different kinds of risks that can be covered under the mega-risk portfolio. Mega-risk policies account for less than 10 per cent of the overall risk portfolio.

Through a circular issued by the tariff advisory committee (TAC) on June 20, the committee said, “It has been decided that insurers will have to file the product in respect of all mega risks with IRDA under the ‘file and use’ system and be guided by what IRDA advises.”

While some insurers have welcomed the move, others view it as an unnecessary attempt by the regulator to trammel their independence and tighten its hold over the insurers.

A senior official from General Insurance Corporation said, “Such a move runs counter to the concept of liberalisation and will further lead to the infringement of the rights guaranteed to us earlier.”

Until now, mega-risk policies were not covered by the ‘file and use’ system which requires every policy on offer to be backed by proper actuarial evaluation.

Insurers believe that mega-risk policies are offered at their discretion and they have the gumption to make their own risk assessments before taking on mega-risk exposures.

“We do not understand the rationale for taking away this freedom where insurers could easily approach the world market and take a cover at our discretion, free from the hassles of adhering to any regulatory framework. It is in our own interest to get a quote at the right price from the reinsurers,” said the GIC official.

However, other insurers who supported the IRDA move believe that the regulator must have some strong and valid reason for taking such a decision.

Sandeep Bakshi, chief executive officer of ICICI Lombard General Insurance, says, “Since the quantum of cover for such mega-risk policies is very high, the regulator has the right to demand and be satisfied that such risks are being adequately covered. We think it is a very positive step.”

Explaining the reason behind issuing such a circular, a TAC official said: “When we allowed insurers to issue mega-risk policies back in 1999, the ‘file and use’ system was not in existence. As a result, the insurers were underwriting business without consulting the IRDA or TAC.”

“Although the system was introduced in 2002, the mega risk policy was not filed with the regulator. However, we felt that the IRDA must know what kind of business is being underwritten for such high risk covers,” he added.

Some industry insiders see another sinister motive behind the move. The insurers cover their exposures to the mega risk policies through reinsurance covers with overseas reinsurers like Munich Re and Swiss Re. However, they feel IRDA now wants to take steps to stop the outflow of funds abroad and instead reinsure part of their risks with GIC, which has been designated as the national reinsurer. They contend that GIC itself seeks reinsurance coverage to hedge its own risks.

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