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Thursday, April 4, 2013

Rates, terms and coverage under Marine Cargo business – IRDA & IDRA

Marine Cargo Insurance for long was considered a profitable business for the Insurers – Apr 1994 sounded a death knell to that perhaps !  In earlier days, the rates and terms of Marine Cargo Insurance was governed by ‘All India Marine Cargo Tariff” and there were only 4 Public Sector Insurers transacting business.

For those of you new to Insurance business, a Tariff  is a schedule of premium rates and policy terms and conditions applicable to risk in a particular class of business.  It was the guide book – a stricter and stronger directive given by the TAC to the Four transacting companies and any  any violation of rates, terms and condition as prescribed by TAC in the tariff  literally meant  violation of Insurance Act 1938 itself.  The purpose of the Tariff as handed from the colonial rulers was to ensure stability in the insurance market, to ensure long term financial strength and to ensure non-discriminatory and equitable rates and terms.  

Viewed in hindsight, the rates were fabulous.  For bagged cargo, for inland transit risks, the Basic coverage (Inland Transit – B) rate would be 0.20% -  Underwriters were permitted to add specified perils to this and for tearing and handling losses it was 0.05%; another 0.05% for rain water damage; another 0.05% for shortage and a similar value for non delivery and so on….  – the ‘All Risks’ rate for a non-hazardous cargo (paddy, rice, wheat, sugar, de-oiled bran and the like) in gunny bags would be not less than 0.41% + SRCC rate @ 0.0225%  - thus for 1,00,000/- sum insured, the premium collected would be  closer to Rs.500/- 

Even in those days, we felt that there was no element adjusted in the premium to take care of the probable catastrophic losses.  Whilst the law of large numbers might take care of the Interests of the Insurers when the spread of the risk is large, it would still expose them badly in the case of a catastrophe.  We used to deliberate that if you take the statistics of say a 3 year period pertaining to Marine Cargo Insurance, one bad year perhaps be offset by the total premiums of various marine cargo interests  - yet, there were couple of huge losses arising out of sinking of vessels and the value of cargoes lost themselves represented crores of rupees, which may not get collected from that particular Insured, even if one were to underwrite their  business for decades together.

Years later,  an act of Indian Parliament known as IRDA Act 1999 created a national agency called  The Insurance Regulatory and Development Authority (IRDA) to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.

Now we have 24 Companies transacting General Insurance business, but the Marine cargo insurance rates are at rock bottom, far cry from what they were in 1994 or earlier……………………

The Nation  with a total area of  3,287,263 km2 and a population of  121  crores shares land borders with a much smaller Nation Bangladesh which has  147,570 km2 and a population of 15 crores.  In Bangladesh, the Parliament in Mar 2010 passed  two insurance laws in a bid to further strengthen the regulatory framework and make the industry operationally vibrant. The new laws, came in to effect on 18 March 2010, are Insurance Act 2010 and IDRA 2010.

Just like our Insurance Regulatory and Development Authority (IRDA), Bangladesh has  Insurance Development and Regulatory Authority (IDRA)

There are 62 insurance companies operating there consisting of 2 PSU, 43 General Insurers and 17 Life Insurance Companies.  There are news now that the premium rates for marine insurance are to be increased  and the Regulator (IDRA) has  refuted the claim that it has increased premium rates for marine insurance or imposed any new rules or regulations.   Quoting its chairman it is stated that no gazette is issued on new rules & regulations in the last 8 months.   There was also a statement that they didn’t increase the rates but instructions were given to Insurance companies not to provide any discount…!!

There also discounts appear to be rampant and some examples have been cited wherein discounts upto 70% have been granted.  There is apprehension in Insurers that they would lose the business when discounts were not provided.    In Bangladesh, the Central Rating Committee in its 143rd meeting  held on 12 July, 2011 and an emergency meeting (Meeting-144) held on 10 August 2011 took a number of wide ranging decisions effective from 04-09-2011.  IDRA had stated that those decisions were indispensable for increased discipline and uniformity in market practices in creating a level playing field and improving the financial strength of the companies.    Some of the decisions are :   All companies would strictly abide by the existing fire and marine tariff rates, which will include 10% tariff discount until further instruction; Special tariffs for some business segments becoming invalid;   special tariff rates only where 3 years average annual premium was up to a specified level and claims experience below a specified level.

Marine Insurers are considered most prudent Underwriters and learning from the experiences of others is a primary learning !

With regards – S. Sampathkumar

Post made on 12th Aug 2011 and placed on the web now….


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