Detariffing may up companies' deductibles

KOLKATA: Corporates opting for fire, engineering and project insurance may witness a quantum jump in deductibles after the general insurance industry gets completely detariffed from November this year. Currently, this is controlled at nominal levels by the regulator.

Deductible is the amount of loss shelled out by policyholders before any loss is paid by the insurer in the event of a claim. In practice, the deductible is adjusted from the claim amount paid by the insurer. In November 2007, the Insurance Regulatory & Development Authority (IRDA) is slated to withdraw all controls on pricing. Following this, general insurers are likely to increase the quantum of deductibles which is as low as Rs 10,000 for fire policies now.

In a free market scenario, a lower premium sees a larger deductible. Although IRDA had partially detariffed the general insurance industry in January 2006, following which premiums for engineering, fire and projects had dipped 40-50%, deductibles remained the same. It still remains controlled.

The controls are slated to be dropped from November when the industry is completely detariffed. “In a bid to correct the balance, insurers may adjust the deductibles upwards to balance their risk portfolio in tune with international standards,” Bajaj Allianz General Insurance general manager Mr Swaraj Krishnan said.

“Actually, there has not been any change in the deductible for the last so many years, although premiums have dipped. The reinsurers are not very comfortable with this,” said an insurance expert from Tata AIG.

“Although premiums have dipped, following partial detariffing, there has not been commensurate increase in deductibles which will possibly get corrected after November. This is currently an issue with the reinsurers, as a major portion of risks for large industrial projects are transferred to them,” said Mr Krishnan.

“This time, as the industry is completely freed of tariff controls, premiums for assets may decline another 10-20% and deductibles are also likely to simultaneously rise. The quantum of rise, however, is yet to be calculated,” said an insurance analyst with Tata AIG General Insurance.

“If clients prefer lower premiums, they should also be prepared to retain a larger portion of the risk themselves as is the norm internationally,” he said. Currently, deductibles for industrial fire policy is 5% of the loss amount or a minimum of Rs 10,000, whichever is higher. For large engineering covers, it is Rs 50,000 and it has remained the same for a number of years.

“Internationally, deductibles for properties are about $5,000 for office and hotel properties. While this is as low as $25 in India. There is a huge difference, which will gradually get balanced as controls are lifted,” said the official from Tata AIG. For large projects, deductibles charged abroad can be as high as $1 million. In the domestic market, this is about Rs 50 lakh for a similar cover.

The quantum of deductibles will depend on the quality of the assets, risk perception of the insurer and the reinsurers, past experience of claims etc. Hence, if clients need higher coverage, they will have to pay higher premium or settle for a large deductible.