Irda restores discount on ship insurance

The Insurance Regulatory and Development Authority (Irda) last week restored the discount applicable to ship owners on hull & machine insurance to 15 per cent of the premium amount.

Shipowners who take the insurance cover directly and not through agents or brokers are eligible for this, an Irda circular said.

Irda had through a circular issued on June 8 reduced the discount enjoyed by ship owners to 10 per cent. This had led to a representation by the Indian National Shipowners Association, the apex body of domestic shipowners, seeking that the new circular be kept in abeyance till they had a chance to place their views before the regulator.

"In view of the above representation and in suppression of circular no GENCIR21JUN-04 dated June 8, the authority hereby directs that in addition to owners discount of 10 per cent wherever applicable the shipowners will also be eligible for a 5 per cent special discount in lieu of agency commission brokers remuneration until further order if the business is placed with the insurance companies directly without utilizing the services of either agents or brokers," the latest circular says.

Marine insurance is governed by the Indian Insurance Act, which does not allow placement of any insurance available in India abroad.

This means that Indian shipowners can take hull and machinery cover from only Indian insurance companies and they have to renew it every year. Hull and machinery cover is for the entire ship but does not cover the cargo being carried.

INSA's demand comes in the face of competitive pressures being faced by the domestic shipping industry. The shipping industry has for years been clamouring that it be allowed to take insurance cover outside India. This is because the global premia has been much lower compared to that offered by Indian insurance companies.

INSA had pointed out in its representation that shipping is an international business and global competitors of domestic shipping companies could avail of insurance cover at far more competitive rates.

Further, since shipping is a capital intensive industry, insurance forms a very high percentage of the operating cost. INSA has estimated that in case of a ship valued at $40 million, the hull and machinery premium could comprise as much as 25 per cent of the operating costs.

INSA has also petitioned Irda about the scale of brokers remuneration (fixed up to 12.5 per cent) of premium. The INSA case is that if underwriters (insurance companies) pass on a 10 per cent discount to shipowners and pay 12.5 per cent as remuneration or commission to the brokers, this will result in 22.5 per cent reduction in the net retained premium.

The association argues that if the insurance companies are able to pay 22.5 per cent of the premium out, and still make profits then the shipping companies have been charged excessive premium in the past.

"There is definitely a case to reduce the premium especially in case of those shipowners who do not wish to use intermediaries," Insa had said in its representation.

A few months back, an internal study by the shipping ministry had revealed that a total overhaul is required in all aspects of marine insurance, including hull and machinery insurance, war risk insurance and reinsurance for the high value vessels.