By M.C. Govardhana Rangan
Dec. 10 (Bloomberg) -- India’s latest terrorist attacks may decimate a pool of funds set up by the nation’s insurers to cover such claims, potentially leaving victims of any new assault financially exposed.
Payments to the three luxury hotels damaged in the Nov. 26 attacks may erase about half of the 12 billion rupees ($241 million) that insurers set aside under regulatory requirements, said Radhakrishna Chamarty, director of India Insure Risk Management & Insurance Broking Services Pvt. in Mumbai.
Terrorists have killed more than 500 people this year in India with attacks on markets, mosques, bus and railway stations, making it the worst year since 1993. The escalating war with extremists will prompt more companies to seek terror insurance coverage, drive fees higher and force insurers to step up payments to the pool, industry executives said.
“There may not be enough left for tomorrow,” Chamarty said in an interview. “When you have a situation where the pool is in danger of getting wiped out, there will be a change in the approach.”
Last month’s carnage may prove especially costly because of the value of paintings and sculptures at the 105-year-old Taj Mahal Palace & Tower hotel, where terrorists took hostages, threw grenades and fought room-to-room battles with special forces.
The terrorists also destroyed parts of EIH Ltd.’s Oberoi and Trident hotels. The attacks, which ended on Nov. 29, left about 163 people dead.
Premiums to Rise
The incident probably will increase the cost of terror- related insurance as more companies opt for coverage. Indian companies currently pay about 0.22 rupee for every 1,000 rupees of coverage, according to K.C. Mishra, director at the National Insurance Academy in Pune.
“This is the first time that the (terror pool) is going to decrease substantially,” said Raj Bora, head of corporate planning at Gurgaon-based IFFCO Tokio General Insurance Co. “In all likelihood, there will be an increase in premiums.”
J. Hari Narayan, chairman of the Insurance Regulatory & Development Authority in Hyderabad, which governs the terror pool, declined to say how much reserves it holds, or how much has been drawn by insurers this year.
“It’s not impossible, but improbable” that insurance funds covering terrorist attacks will be wiped out, the National Insurance Academy’s Mishra said. “The size of the pool needs to be increased.”
Cap on Claims
Indian rules cap insurance claims from a single site at 7.5 billion rupees to prevent one demand from wiping out the pool. The current structure is a result of global reinsurers shunning terror cover after the Sept. 11, 2001, attacks in the U.S.
“We have to ensure that the industry has adequate reserves and builds them up,” said Sandeep Bakshi, chief executive officer of Mumbai-based ICICI Lombard General Insurance Co. “The premiums have been falling in the last few years and it’s time to recalibrate it.”
Taj Mahal, located near the historic Gateway of India, probably will draw on more of the pool’s funds than the other two luxury hotels as it boasts valuables such as paintings by the 19th century artist Raja Ravi Varma, and M.F. Hussain.
“Everything there was of immense value,” said Nivedith Alva, creative director of Hotel By the Bay, an 11-part television series by Discovery Channel featuring the Taj hotel. “The antique furniture, the architecture, Belgian chandeliers; and the fact that people like Nelson Mandela, John Lennon, Brad Pitt and Angelina Jolie were part of it makes it unique.”
Hotels Reopening
Indian Hotels and EIH haven’t disclosed the extent of the damage or potential claims from the attacks. Ketaki Narain, a spokesman for EIH’s Oberoi group, didn’t respond to an e-mail or phone calls seeking comment. Vinifer Gandhi of Vaishnavi Corporate Communications Pvt., which represents Indian Hotels, also didn’t return calls.
The Trident is scheduled to reopen on Dec. 21. Management of the Taj, who regained control of their flagship property on Dec. 1, said the newer wing, which sustained less damage than the heritage building, will be reopened “on priority.”
“Our company has in place adequate insurance cover,” Indian Hotels, part of the Tata group of companies, said in a statement on Dec. 2.
Optional Coverage
Indian insurers sell coverage for terror attacks as an added provision to general insurance, which shields clients from events such as fire, theft and floods. Few companies have opted for the provision because terrorist strikes in recent years have mostly struck public places such as railway stations, crowded markets and the parliament.
“Most companies don’t bother about terror at all since they haven’t experienced it,” said Chamarty. “A lot of them look at it as an expense.”
That may be about to change as companies adjust to the risk of further violence.
Indian airports were put on alert on Dec. 4, less than 10 days after the Mumbai attacks, following intelligence reports terrorists may strike using a hijacked aircraft. The security alert was extended to key government buildings and refineries on Dec. 5.
“One of the mega trends now is terrorism; it will keep increasing,” said Alpesh Shah, a Mumbai-based partner at the Boston Consulting Group who specializes in insurance.
To contact the reporter on this story: M.C. Govardhana Rangan in Mumbai at grangan@bloomberg.net.
Last Updated: December 9, 2008 13:31 EST
