Rising trade stress takes toll on risk firms

High volatility in share prices over the last couple of years amid a surge in the number of trades has increased the stress levels of dealers at brokerages.

This has resulted in mistakes by dealers while keying in client orders and the brunt of which was borne by general insurance companies.

New India Assurance and Oriental Insurance "" the two general insurers which are in the business of providing stock brokers' indemnity insurance cover "" reported claims ratio of up to 270 per cent in 2005-06 from policies sold to brokers.

To offset losses, the companies increased premium rates by around 100 per cent to ensure their premium income this year is more than the claims paid last year. Stock brokers of Bombay Stock Exchange and National Stock Exchange have to mandatorily take the insurance cover.

New India had a claims ratio of 270 per cent and Oriental Insurance 150 per cent in 2005-06.

"The claims ratio is very high under the errors and ommissions section of the policy, primarily on account of punching errors at dealer terminals," a senior official at one of the insurance companies said.

"The stock market is in turmoil. Compared to 2004, the number of transactions have gone up 25 times. In 2004, sensex was below 3,400 points and now it is above 13,000 points. Further, big brokerage houses have opened lots of branches across the country and also appointed hundreds of franchisees making it difficult to record loss experiences," the official said.

Supriya Rathi, director at Anand Rathi Insurance Brokers, said a BSE broker paid Rs 7,500 premium for a policy with sum assured of Rs 5 lakh in 2005-06 and in 2006-07, the same broker has paid Rs 14,000 premium for the same policy.

New India has this year split the policy into a basic one for a broker and additional cover for branches and franchisees.

The premium rates for the basic cover range from Rs 14,000 for a sum insured of Rs 5 lakh to Rs 57,000 for a sum insured of Rs 5 crore.

New India will charge additional premium of 10 per cent of basic premium to a broker with up to 10 branches. The additional premium is 25 per cent of basic premium for 76-100 branches, 50 per cent for 101-250 branches, 75 per cent for 250-500 branches and 100 per cent for over 500 branches. The minimum sum assured ranges from Rs 50 lakh to Rs 5 crore.

Apart from increase in insurance premium, New India Assurance has also increased the deductibles. A deductible is an amount which is upfront deducted from the amount of claims and only the balance is paid.

Oriental Insurance had four deductible options of Rs 15000, Rs 25000, Rs 50,000 and Rs 1 lakh for a Rs 5 lakh sum insured. This July, Oriental issued a policy only with one deductible option of Rs 25,000 for which the premium is Rs 33,629, up from Rs 20,233 last year.

Another public sector general insurer, National Insurance Company, had also launched the stock brokers indemnity insurance policy in 2001. National Insurance was faced with a claims ratio as high as 300 per cent, forcing it to completely withdraw from this business.

BSE offers its 874 broker members an umbrella policy wherein the premium of just Rs 6,000 per broker. The policy is, however, without the errors and ommissions cover (E&O).

"It is just a fidelity guarantee. The E&O cover is very important for brokers as more than 95 per cent of the claims are registered under this section," a broker said.

Sudhir K Tandon, an independant surveyor, said "There should be a penalty on dealers if they repeat mistakes. Also, brokers should not overburden their dealers with volumnious transactions."