Higher Reinsurance Premiums Are Power Sector’s Latest Headache

Indian power producers, reeling under debt, are up in arms against a circular that proposes a threefold hike in their reinsurance premiums.

The Association of Power Producers of India wrote to the Ministry of Power saying implementation of the circular by General Insurance Corporation, issued in February, would adversely affect performance of power plants. The body in its May 22 letter—a copy was reviewed by BloombergQuint—also urged GIC Re, banking secretary to the Ministry of Finance and the insurance regulator to ease the norms.

“The sum assured includes huge coverage of Fire Loss of Profit and Machinery Loss of Profit,” the letter said. “It’s important to note that premium for such losses which are catastrophic in nature and low probability of occurrence needs to be smoothened over… 10-15 years rather than being levied abruptly for a sector that is strained already. A gradual increase of 30-40 percent over a period of five years may be more reasonable and easily acceptable.”

The Indian power sector comprises stressed assets worth as much as $19.2 billion (over Rs 1 lakh crore), with lenders seeking their resolution, Bloomberg reported last year. That comprises plants—mostly coal-fired and underutilised—facing court-ordered loss of mining permits, financing and cash-flow concerns making revival difficult. A push for renewables is also eating into the demand for thermal power.

“The insurance premium has increased by 100 percent for power producers after the GIC circular,” Isaac George, director and chief financial officer of GVK Power Ltd., told BloombergQuint over the phone. “It will be a direct hit on the company’s profit and loss statement.”

That isn’t the sole point of contention in the circular by India’s largest reinsurer. While the material damage deductible has been increased from Rs 50 lakh to Rs 1.25 crore for a 1,000-megawatt plant, business interruption deductible has been revised upward from Rs 46 crore in 2018 to Rs 100 crore this year. During natural calamity, the circular said there would be a waiting period of 30 days before claims are considered.

Deductibles are the amount policyholders must pay before the insurer begins to pay for any expenses, sharing the risk between the policyholder and insurer. Such amounts are reduced from claim payments in the case of a disaster.

GIC Re implemented the hike after a 12-year lull, affecting seven other industries. They are:

• Textile makers.
• Plastics manufacturers.
• Rubber goods makers.
• Chemical industries
• Storage of category II groups.
• Transporter godowns.
• Steel plants.

The hike came after Insurance Information Bureau of India suggested a burning cost rate—ratio of claim amount to sum insured—for power plants, an insurance executive told BloombergQuint requesting anonymity. Insurers, according to this executive, were enjoying heavily discounted rates for a long time, causing losses to the reinsurer.

To be sure, insurance companies cover their business risk by seeking re-insurance from companies like GIC Re, Munich Reinsurance Company or Swiss Reinsurance Company Ltd. That spreads risk and minimises losses for insurance companies, enabling them to take risk beyond their financial capability.

‘Reinsurers Free To Hike Premiums’

Reinsurers are free to declare at what price they’ll accept risk, according to Joydeep K Roy, partner and leader (insurance practice) at PricewaterhouseCoopers. Direct insurers who are dependent on GIC Re will have to follow, he said. “Else GIC Re will not accept their share of the risk putting treaty contracts in danger.”

Roy said that it’s unfair for any sector to presume their losses would be picked up by the insurance industry. “An annual increase is also impractical as insurance companies survive year on year on annual policies.”