The lure of cheaper reinsurance covers and handsome commissions from foreign reinsurers has led domestic non-life insurance companies to reinsure corporate terrorism covers abroad. This is in violation of rules that require them to reinsure terrorism covers in the Indian Market terrorism pool.
A reinsurance company provides insurance to an insurance company. The Indian non-life insurance companies had together set up a terrorism pool after the attack on the World Trade Center in New York on September 11, 2001. As a result of this, foreign reinsurance companies had refused to provide reinsurance to Indian insurers. With the support of the pool, non-life insurance companies can provide a terrorism cover up to Rs 750 crore to a corporate while bigger terrorism covers can be got reinsured from foreign reinsurers.
The funds from the pool are then used to pay back the claims arising out of terrorist attacks, such as the November 26, 2008 attacks on Taj and Trident hotels in Mumbai, which resulted in claims worth roughly Rs 500 crore.
The pool’s manager, General Insurance Corporation (GIC), sent out a warning to all insurers last month saying that this unhealthy practice is depriving the pool of premium and it is looking at imposing a monetary penalty for such violations.
On why insurers violate the rules, a senior GIC official said, “The pool does not pay anything to an insurer or broker for bringing business. However, foreign reinsurers pay commissions ranging from 5 to 15 per cent of the premium to an insurer. The insurance company then pays a good commission to the broker. So, both are complicit in reinsuring terrorism covers abroad.”
The Indian Market terrorism pool earns a reinsurance premium of Rs 300 crore annually. Even the premium rates of the terrorism pool are higher than those offered by foreign reinsurers.