Insurance companies have more than doubled fire insurance premium due to a rise in claims
A bulk drug manufacturer was shocked to see his fire and allied insurance premium jump to Rs 35 lakh, compared to Rs 5 lakh from a year back.
The official thought this was an insurance company-specific matter and decided to switch to another insurer. However, everyone else also quoted the same premium and he returned to the original insurer.
Amid rising cost concerns, bulk-drug makers have another pinch on their wallet in the form of a significant jump in insurance premium for fire and allied perils in manufacturing facilities.
Following a directive by the country’s sole domestic reinsurer General Insurance Corporation of India (GIC Re) in February 2019, 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.
The bulk drugs segment was now classified as one of the eight occupancies, along with chemical manufacturing below 32 degrees centigrade flashpoint, rubber goods, plastics, textiles, thermal power plants, steel plants and transporters’ godowns.
"It adds to the cost and is not insignificant. They tripled and quadrupled the premiums," said Yasir Rawjee, CEO of Glenmark Life Sciences.
Why were premiums increased?
When it comes to pricing products insurance companies are dictated by past claims data and reinsurance premium. GIC Re being the sole domestic reinsurer has a say in what premiums will be charged.
Claims data collected from the Insurance Information Bureau showed a significant rise in loss ratios in fire insurance. This meant that the premium collected was not proportional to the claims paid.
For a few insurers, loss ratios had crossed 150 percent, which meant that for every Rs 100 collected as premium, they paid Rs 150 in a claim. Add to these natural calamities that led to a rise in fire and allied perils like lightning and explosions due to accidental fire, etc.
"It had to do with the Chennai floods. That was the trigger point. There was a huge number of claims that led to losses," Rawjee said.
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.
"What is now being charged is the adequate premium for the risk being insured. A reduction is not viable and will directly impact insurers’ bottom-line," said a senior insurance official.
How does it impact drugmakers?
Companies typically spend about 1-2 percent of expenses on insuring their current and fixed assets against various risks such as transit, fire and allied risks. This spend is now expected to rise significantly.
"They increased the insurance in an unrealistic way. People have gone to court," M Narayana Reddy, MD of Hyderabad-based Virchow Laboratories said. Virchow is one of India's largest bulk drugmakers.
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.The problem now arises for India's bulk drug industry, which is struggling to lower costs to compete against the world's bulk drug powerhouse, China.