The fire insurance rates for 291 occupancies have been revised from January 1 onwards. With General Insurance Corporation of India (GIC Re) mandating that a host of new industries be covered under the annual rate revision, fire insurance premiums will be revised upwards between 10-50 percent for most firms.
This is to ensure that burning cost is considered and discounts are not given. Burning cost refers to the cost of insuring a property/unit and what is the nature of the risk it is for an insurer.
Discounting has been a common practice in segments like fire insurance, where despite higher claims in the previous year, lower premiums are charged. This helps general insurers retain corporate clients, but impacts their profitability.
In 2019, only eight industries were mandated to be charged market rates based on past claims experiences. From 2020, almost entire India Inc has been categorised into the list of occupancies where discounting will be barred.
A direct impact of this will be that companies across sectors will face an upward revision in insurance premium. This will be passed on to customers in the form of a rise in the selling price of the products being manufactured in the facilities.
Fire insurance refers to fire and allied perils including lightning, storm, flood, earthquake, explosion among others. The plant, machinery, stock and furniture in a unit of a company.
When GIC Re hikes rates, insurers which take a risk cover from the former are mandated to pass it on to their customers.
Moneycontrol had earlier reported that GIC Re was planning to hike the reinsurance rates.
Subrata Mondal, Executive Vice President, IFFCO-Tokio General Insurance, had told Moneycontrol that in 2019, there were eight major industries and 36 occupancies where rates had to be linked to be burning cost.
"This year (2020) a total of 291 occupancies are on the list. On a parallel basis, for about 29 industries there has been a rate decline. For the rest there has been an increase from a practically nil rate. New industries include almost all segments. From an insurer's perspective this will make fire insurance sustainable. Earlier, the rates were too low," Mondal. had said.
Overall, this move is expected to benefit the insurance sector from an underwriting perspective. Currently, loss ratios in fire insurance are above 100 percent meaning that the premiums collected are lower than the claims paid.
Industry sources said that natural catastrophes (even small incidents) have led to heavy material damage in the recent past have led to a rise in claims.
For about 29 occupancies there could be a slight reduction in the fire insurance premium while for the rest it has gone up by as a maximum of 40-50 percent.
In 2019 as well, following a directive by the country’s sole domestic reinsurer GIC Re, insurers were mandated to hike fire premium for a set of eight occupancies. Premium increased by three to four times the existing amount to deal with rising claims in the segment.
Following this, in April 2019, companies such as Cadila Healthcare, Wockhardt, and Lupin among others had challenged the GIC notification hiking rates in the Delhi High Court.
Wockhardt in its petition complained about the premium rising by 342 percent from Rs 1.32 crore to Rs 5.83 crore, excluding the goods and services tax. It contended that the GIC circular was arbitrary and unreasonable.
The Delhi HC, however, dismissed the petitions and upheld GIC's right to determine rates at which it offers re-insurance in respect of risks covered by various insurance companies.
Fire insurance pricing was freed in 2007. This meant that insurers could fix the premium for each fire policy depending on the past claims experience and their risk-taking ability. However, in a bid to retain corporate clients, insurers started offering almost 80 percent discount despite rising claims.
Even after GIC Re asked insurers to hike fire premium in certain segments, losses in this segment continued since there are several occupancies that produce high claims.
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