Mumbai: Indian companies have been significantly impacted by the West Asia war, and immediate concerns for domestic insurers are inflation and supply chain disruptions, given the likelihood of increased risk values or catastrophes.
Even as India remains “significantly under-insured”, recent government measures, such as allowing 100% foreign direct investment (FDI) into the sector, will help bring more insurers into the country and create additional capacity, C, told Mint in an interview. Edited excerpts.
What are the major insurance risks globally right now?
The current state of the global insurance market is soft, implying that prices have been declining and coverage has been increasing, except for select segments such as motor and aviation. We expect this correction to last 1-1.5 years rather than be a long-term trend, because risk factors such as cybercrime and climate change still exist. The other is US liability insurance, which accounts for 50% of the worldwide insurance market and is a very large issue.
What insurance solutions are most sought after by Indian companies?
India has been significantly impacted by the West Asia conflict, and an immediate concern is inflation because that drives up the value of risks or catastrophes. The insurance market is concerned about that. However, India is significantly under-insured. Many companies don't buy any insurance, or everything that other companies buy around the world. Supply chain is an issue because if the supply chain is snarled in case of a catastrophe, it takes longer to rebuild, which means losses are higher.
Loss modelling, like other decision-making tools, is getting more sophisticated. We have a lot of data on catastrophes, losses and weather patterns. Indian companies are increasingly global, so while they may not have grave domestic exposure, they may have in other parts of the world. We can demonstrate the quantity and probability of exposure they face at different confidence or risk levels.
We’ve seen more government-backed insurance measures in recent years. How has been the response by insurers and do we need more such measures?
Government policies have been targeted at increasing insurance penetration. Allowing 100% FDI will bring in more insurers to India and create more capacity. The government is doing the right things, an example of which is the $1.5 billion maritime insurance pool and the proposed strategic natural disaster-related programme. Most states are interested in parametric covers in case of catastrophes to protect the very base layer of society. Those are steps in the right direction, but with global intelligence, it can become much faster.
Formalized or not, the government is always the insurer of last resort and they may want to shore up that position. But, in general, the private market works very well and should be allowed to compete. The global market is expanding to meet the increasing insurance needs. There have been discussions about governments stepping in to insure data centres since they're critical infrastructure, but increasingly that's being met by private insurers and capital markets.
Shipping has been one of the worst-hit industries due to the West Asia war. What is your assessment of the insurance claims so far?
Shipping claims have been significant but not dramatic. The private market is responding, especially London–where most of this insurance is done. People take issue that insurers cancel policies when there is a war or conflict. But insurers tend to reprice, they don't walk away. That's how business has been done for 300 years because the alternative is to pay a higher price all the time, which nobody wants. The tried-and-true mechanism is to have the price follow the actual risk.
Beyond shipping, which other segments were hit due to the War?
War and political violence insurance is available, and most companies that have operations in West Asia do buy it. The losses from the West Asia conflict will outpace the Russian-Ukraine conflict, but it's not unmanageable and is not causing insolvencies.
Credit risk is another concern. People worry about the counterparty not being able to pay, especially in markets where structured credit and performance guarantees are impacted. But it's still within the confines of normalcy in the insurance market, and isn't causing any alarms to go off. Premiums are going up for these coverages.
How do you price for risks pertaining to heavy energy requirements for data centres?
The data centre boom accelerated in the past few years. Projects are now being built valued at $10-30 billion and the insurance industry doesn't yet have the capacity to deal with them. Until last year, the entire industry could only place $8.5 billion, today Aon can place $12.5 billion, a 50% increase, and by the end of the year this figure will probably be $16 billion. The private market is responding and capital is coming in.
There is global concern about supply chains, particularly around the power needed to run data centres. Power grids cannot easily handle these, and more data centres are being built with their own power plants. This is why there is a worldwide shortage of turbines and of various kinds of electrical panels and cables.
What are the other key risks with respect to the massive investments being made in data centres?
The sheer scale of data centres is like nothing seen before. The financing is enormous, and many companies prefer to have some financing which requires insurance. We're advising hyperscalers to embed engineering and risk control, and site selection at the beginning of construction, because that impacts whether they can buy insurance and how much. We also advise on how to build structures and organise the supply chain to be resilient because if there is a catastrophe, the downtime will be dramatic as there's only so many global contractors who can build these.
An integrated way of looking at it is becoming more the norm with varying regulations, renewable power and ESG being serious considerations.