Chennai: When India’s biggest corporate fraud surfaced three years ago, the insurance industry seemed justified in expecting an increase in demand for liability insurance that protects management against claims stemming from executive misdemeanours.
Satyam Computer Services Ltd founder B. Ramalinga Raju’s 7 January 2009 confession of fudging accounts to the tune of Rs 7,136 crore did spark corporate interest in so-called directors and officers (D&O) policies, but didn’t translate into purchases.
Such policies protect the top management against claims for damages stemming from perceived or real misdeeds. The insurance company bears the burden of both legal costs and payouts if an insured executive is found liable.
“Post the Satyam crisis, there was a temporary spurt in the interest and demand for this policy,” says T.A. Ramalingam, head of underwriting at Bajaj Allianz General Insurance Co. Ltd. The insurer received many enquiries from companies about D&O policies after the Satyam case surfaced, but the interest slowly tapered off, he adds.
Both corporate apathy and the reluctance of insurers to invest the time and effort required to sell the niche policies that make up a small portion of the insurance market in India may be responsible for D&O policies not catching on.
Only 5-6% of publicly traded companies in India have taken D&O policies, compared with nearly 95% of Fortune 500 companies, according to Pravin Gupta, managing director, Raheja QBE General Insurance, which operates exclusively in liability insurance.
Insurers estimate D&O policies to be 20-25 % (Rs 200-250 crore) of liability insurance, which was Rs 1,023 crore in the year ended 31 March, an 18% increase from the previous year.
Public liability insurance protects workers and people residing near hazardous plants. Other public insurance is not compulsory but is taken out by cinema halls and shopping malls to cover their liability arising due to injury or fatality to people in their premises. Product liability protects exporters of damage to products during transit. These form the major part of liability insurance.
The fraud at Satyam, ranked India’s fourth biggest software services firm when Raju confessed, sparked an employee exodus and a wave of a client defections from the Hyderabad-based company. Bought by Tech Mahindra Ltd at an auction in April 2009 and rebranded Mahindra Satyam, it is still struggling towards a full recovery.
The Satyam case created awareness about D&O policies, but this did not translate into companies buying them as a risk-management measure, says Gupta.
That despite premium charges having dropped steeply. Annual premiums on a $1 million D&O insurance policy have dropped by one-third to Rs 2 lakh currently from Rs 3 lakh three years ago.
D&O cover is largely taken out by companies with an overseas presence or exporting to countries such as the US, the UK, Australia and Canada. Indian companies that take this policy either have foreign joint venture or overseas equity investments or have foreign collaborations.
Rahul Agarwal, chief executive, Optima Risk Management Services, an insurance broking firm, says companies that perceive risks are the only ones taking this policy. His firm sells 20 policies and the average risk cover is taken for $2 million a year, up by 10 policies for an average sum insured of $1 million per policy three years ago.
Despite premium cuts, the reason why companies aren’t enthused by these policies is because insurers are not willing to invest time and energy in selling them for a small premium, says Agarwal.
Rajive Kumaraswami, head, corporate centre, ICICI Lombard General Insurance Co. Ltd, says it takes at least three-six months to sell this policy. With the general insurance industry already burdened by large underwriting losses, a high expense ratio on selling a niche policy is generally not encouraged by insurance companies.
Also, chief financial officers of listed companies tend to see the policy premiums as a cost that provides no immediate benefits and cuts into profits.
Indian companies do not see the need for liability insurance because of a belief that the country’s long-drawn legal procedures would deter shareholders from suing them, says Bajaj Allianz’s Ramalingam.
R. Krishnamurthy, managing director, products, distribution and markets, Towers Watson, says the popularity of D&O policy is linked closely to shareholder activism and corporate governance, which are yet to strike strong roots in India. Towers Watson is a global professional services company that helps organizations improve their performance through financial and risk management.
While the Satyam case is yet to see any outcome in India, the company has settled three cases in the US so far this year.
The company agreed to pay $125 million to shareholders to settle a lawsuit in New York in February; it also agreed to settle a $10 million lawsuit by US markets regulator Securities and Exchange Commission in April. Another case in the US against its auditors, PricewaterhouseCoopers Llp, for over-statement of accounts, was settled to the tune of $25.5 million in May.