The government is expected to exempt contributions made by insurance companies to the proposed catastrophe reserve from corporate tax.
The Insurance Regulatory and Development Authority (IRDA) has proposed that insurers contribute 5 per cent of their gross direct premium income (GDPI) to the catastrophe reserve.
Finance minister Yashwant Sinha and economic affairs secretary CM Vasudev recently met New India Assurance and General Insurance (Public Sector) Association chairman KN Bhandari to discuss the issue.
Based on the present GDPI level of around Rs 10,000 crore, general insurance companies will contribute around Rs 500 crore to the catastrophe reserve. In case life insurance companies contribute as well, the corpus of the reserve will swell to nearly Rs 900 crore.
A proposal to this effect has been pending with the revenue department. The exemption is likely to be announced in the Budget for 2002-03 though it will result in the exchequer foregoing a minimum of Rs 200 crore in revenue.
The catastrophe reserve fund can be used in case liability from a single incident exceeds Rs 50 crore. The reserve will be in addition to the 10 per cent terrorism surcharge levied by the Tariff Advisory Committee on fire and engineering insurance.
The reserve was planned following the earthquake in Gujarat on January 26 last year, which resulted in an outgo of around Rs 1,000 crore in settlement of claims. The issue once again hit the limelight following the experience of global insurance companies which had to settle huge claims after the September 11 attacks in the US.
The matter was also discussed at a recent meeting of the General Insurance Council. A provision for insurance companies to contribute to the catastrophe reserve has also been made in the accounting procedures governing insurers. The guidelines say that the reserve is aimed towards meeting losses which may arise due to an entirely unexpected set of events and not for any specific known purpose.
"The reserve is in the nature of an amount set aside for the potential future liability against insurance policies in force," it added. Detailed guidelines to be issued by IRDA are subject to clearance from the Central Board of Direct Taxes.
