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Essar may have to pay penalty for terror cover

Essar may have to pay penalty for terror cover
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First Published: Wed, May 25 2011. 12 12 AM IST
Updated: Wed, May 25 2011. 12 12 AM IST
Mumbai: Essar Steel Ltd, the steel-making arm of the diversified Essar Group, may have to pay a penalty if it wants domestic insurance cover against terror attacks for a critical installation, three persons familiar with the development said.
The assets in question are Essar’s 8 million tonnes per annum pellet plant at Visakhapatnam (Vizag) and, more crucially, a 267km-long iron ore slurry pipeline that supplies to the company’s Vizag plant and runs between Balaidila in Chhattisgarh and Vizag in Andhra Pradesh, through Naxalite and Maoist territory.
The pipeline, the second longest of its kind in the world, and the pellet plant have been without insurance cover since December, after the company’s previous reinsurers in Lloyd’s UK market refused to renew the terror cover following a massive claim of Rs 907 crore last year.
In March 2010, Essar raised the claim after its pipeline was damaged in a terror attack.
Essar Steel’s assets were insured against terror attacks by state-owned non-life insurer New India Assurance Co. Ltd for Rs 1,000 crore, which in turn reinsured it in the overseas market with Lloyd’s.
In March 2010, the pipeline was damaged in a Maoist attack and the company made the claim, which is still pending settlement. A senior New India Assurance official, who did not want to be named, said the insurer is in the process of surveying the losses claimed by Essar.
The foreign reinsurer’s reluctance to renew the stand-alone terror cover for Essar Steel has forced the company to opt for the so-called domestic terror pool for the first time. The pool, Rs 750 crore for the current year, is floated by the lone Indian reinsurer General Insurance Corp. of India, or GIC Re.
Essar Steel declined comment for the story.
Since the company has so far bought terror cover policies reinsured by foreign reinsurers, and is facing a huge claim settlement process, GIC Re referred the issue to the underwriting committee of the domestic terror pool.
Following initial rounds of meeting, the five-member underwriting panel decided to offer reinsurance cover to the firm only if it agrees to bear a “penalty premium amounting to three years’ difference in premium between the premium for overseas reinsurance and that currently charged by the domestic terror pool”. Thereafter, the company will need to pay premium at regular pool rates.
This was stated in an email addressed to all the non-life insurers by GIC Re.
The email states that after “lengthy discussions” at two meetings of the pool underwriting committee on 20 January and 23 February, it was agreed that the “pool can allow risks which were earlier reinsured outside the pool, to be ceded to the pool subsequently at renewal or mid-term”. “The underwriting committee has recommended that the specific instance of Essar Steel risk also be dealt on similar lines,” the email said, seeking confirmation of members.
Mint has reviewed a copy of the email.
Following the email, some non-life insurers that are members of the terror pool have raised questions on the committee’s decision. A senior GIC Re official said a final decision will be taken in a meeting scheduled in the second week of June.
GIC Re formed the terror pool in 2002. Since then, the size of the domestic terror pool has increased from Rs 200 crore to Rs 750 crore. All domestic non-life insurers contribute a certain amount to it every year.
Citing a higher premium and inadequate size of the domestic terror pool, a number of Indian firms chose to go for separate stand-alone terror covers, reinsured by foreign reinsurers. Some foreign reinsurers also entered the Indian market with lower rates for higher amounts of insurance and many Indian firms, including Essar, opted to avail their services.
“In Essar’s case, when the foreign reinsurer refused a terror cover, they came to us. The underwriting committee felt that whenever such cases arise, companies should not be allowed an entry to the domestic terror pool so easily,” the GIC official added.
Typically, insurers refrain from covering those assets against terror that are prone to attacks or have a history of claims. The domestic terror pool itself is further reinsured by global reinsurers, including Munich Re and Swiss Re, as the corpus of the pool is large by Indian standards.
When a company’s liabilities are considered to be larger than the size of the domestic terror pool, it opts for global reinsurers who are capable of offering large terror covers at lower premium.
The GIC Re official said many firms have been opting for foreign reinsurers for this reason. Mint could not ascertain the names of such firms, apart from Essar Steel, but GIC Re’s decision to impose a penalty on such companies may discourage the practice in the future. The official added that thus far, Essar Steel was the only company that had been covered by a foreign reinsurer to seek reinsurance from the domestic pool.
The rates for the domestic terror pool have gone up following terror attacks in Mumbai’s landmark Taj Mahal hotel on 26 November 2008. “The loss to the terror pool from this incident (Mumbai attack) is estimated at Rs 500 crore,” the Insurance Regulatory and Development Authority said in its annual report for 2008-09.
As far as industrial pipelines are concerned, the domestic terror pool had settled a Rs 7 crore claim by Indian Oil Corp. Ltd in 2003 after a part of the company’s oil supply pipeline was damaged in Assam by the United Liberation Front of Asom, a local militant outfit.
Another person familiar with the development, who did not want to be named, said that a figure, including the premium and penalty that Essar would have to pay, was yet to be intimated to the company.
The company may be willing to pay the same, he added.
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First Published: Wed, May 25 2011. 12 12 AM IST