• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

C. Shivkumar

BANGALORE, March 12

PETROLEUM refineries are expected to face large hikes in insurance premiums on risk cover due for renewal, on account of the changes effected by reinsurers in the risk weightage for Asia.

Industry sources said that reinsurers have escalated their risks and consequently, their probable maximum loss (PML) ratios. An escalation in the PML ratio tells on the premium paid.

The reinsurance premiums are currently in the range of one per cent of the sum insured. The cost of cover was earlier about 0.3 per cent of the sum insured.

Sources said the risk covers coming up for renewal include that of Kochi Refineries Ltd, Chennai Refineries and Mangalore Refineries and Petrochemicals Ltd. Besides, the risk cover of the refineries belonging to public sector oil companies are also due for renewal.

The changes effected by international insurers in the PML have begun to impact the premia paid by companies renewing their risk cover. For instance, one refinery of the Reliance group saw its premium rise by 65 per cent over last year. The rest of the refineries are also expected to face a similar escalation in cost.

Most of the public sector refineries, which have been insuring on the basis of market value, are expected to switch over to a reinstatement cost basis.

While claims settlement in the former is done on the basis of the depreciated value of the assets, in the latter, it is done on replacement cost of assets. Consequently, the premium on the latter is expected to be much higher.

Companies are switching to the latter mode on the insistence of financial institutions, which have large exposures in the refineries and petroleum companies, both by way of project debt as well as equity.

Sources said that these changes would escalate premium costs on renewal even after factoring in the no-claims discounts.

In some of the sectors, reinsurers have refused to assume the risks involved as a result of the changes made to PML ratios. Further, the sources said, that it was not the changes in the risk perception alone that had lead to increases in the PML ratios.

Other factors which have prompted the hike in premiums included the past year's unusually high claims experience from Asia.

This was due mainly to the civil unrest, natural calamities and man-made disasters in this region. These high claims come close on the heels of the September 11 attacks in the US, which had lead to a complete overhaul of the PML calculations.

Besides, returns on investments have also been low for most of the insurance companies, both in equities and debt securities. Further, investments in sovereign securities such as Argentina have also become loss-making. Insurance companies traditionally subsidise underwriting losses with investment returns.

The hike in insurance premiums could, in turn, impact refining margins this year. This is especially since the escalation in insurance costs comes close on the heels of the dismantling of the administered pricing mechanism for petroleum products. The premium increases could impact the ability of the refining companies to pass on the costs to the consumers.

Insurance costs are normally treated as part of the recurring fixed cost of projects.

Send this article to Friends by E-Mail

Stories in this Section
Domestic market must drive growth

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line