L1, a dirty word for the insurance industry

L1 is a four-letter word where the insurance industry is concerned.

Not because it denotes the lowest "" and by government norms, the winning "" quote for an insurance cover in the public sector.

The word is dirty because state-owned enterprises, including airlines, oil giants and public sector undertakings that buy mega risk cover, have to, by rule, go for the lowest quote when buying risk cover.

Lest they run the risk of being pulled up by the Central Vigilance Commission. This, in turn, leads to the flouting of the norms laid down by the Insurance Regulatory and Development Authority (Irda).

The regulator insists that local insurers should buy risk cover from global reinsurers rated the equivalent of the global rating agency Standard & Poor's BBB.

However, as PSUs have to accept the lowest available quote, the local insurers end up buying risk cover from entities rated below investment grade (BBB).

Also, more important parameters such as the quality of the risk cover, and the established ability of the insurer to pay up in the case of claim "" are often given the go-by.

When a government-owned company goes to the overseas insurance market to buy risk cover, it calls for sealed tenders from vendors.

This means without ensuring the quality and the rating of the global insurance companies, the PSU simply selects the insurer based on the cheapest quote.

This rule applies to risk covers bought by ONGC, Air India, Indian Airlines, and a host of other public sector undertakings that have gone abroad to cover risks.

Global insurers are equally not comfortable with this practice. Reinsurers say, this is not a healthy habit of opting for the cheapest quote.

Russell M Merrett, treaty underwriter & principal, Hiscox Syndicate, the third largest syndicate firm in the Lloyds insurance market, UK, said: "Reinsurance is not just about buying at the lowest quote. It is important to be confident that when the time comes the reinsurance company has the ability and willingness to pay claims."

However, state-owned insurance companies said "like it or not, the L1 guideline given by the CVC stays."

The Irda, however, does not get into the nitty-gritty of ensuring that individual company risks are placed with BBB-rated insurance companies.

"It is not our job to get into the minute details of reinsurance," said Priya Bharath, deputy director, Irda. It is up to insurance companies, regulated by the Irda, to ensure that they are not flouting regulations.

"We cannot comment on the internal procedures of a company in terms of whether it is looking at L1 or buying the best cover possible," she added.