MUMBAI // Premiums for terrorism insurance - purchased by property owners to cover potential losses resulting from attacks - are set to rise for the second time in three years after last week's series of bombings that rattled India's seaside financial capital and left at least 17 people dead.
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Premium rates were increased by 25 per cent after 10 gunmen entered Mumbai in November 2008 and went on a killing spree in a crowded train station, two five-star-hotels and a Jewish community centre. That attack, which claimed 166 lives, is regarded as the worst terrorist assault on Indian soil.
Last week's coordinated bombings in a crowded diamond trading market and two other congested business districts - the fourth terrorist assault in Mumbai in eight years - has heightened risk perception and increased the demand for terrorism insurance, experts say.
"Such events usually trigger a surge in demand for such insurance cover by 15 per cent to 20 per cent," says TA Ramalingam, who heads the underwriting division at Bajaj Allianz General Insurance, a non-life private insurer.
Insurance claims worth 6 billion rupees (Dh494.2 million) were paid out - from a "market terrorism pool" of insurance premiums worth 17bn rupees - to settle similar claims after the 2008 Mumbai attacks. The terrorism pool was set up in 2002 with a sum of 2bn rupees after the September 11 attacks in New York the previous year and is managed by the General Insurance Corporation (GIC), which in turn was set up by the Indian government more than three decades ago as India's only reinsurance company.
Claims received by insurance companies in 2008 from Taj and Trident hotels - two five-star hotels badly damaged in the attack - alone amounted to 2.1bn rupees. The market terrorism pool, which is expected to dramatically rise this year if premium rates are hiked, stood at 14bn rupees before the 2008 attacks.
Insurance companies say they are assessing damages from last week's attacks in which three explosives-rigged vehicles were detonated.
Terrorism insurance is rapidly gaining prominence in India. The country is the most attacked nation on Earth after war-torn Iraq, according to a 2009 estimate by the Worldwide Incidents Tracking System. But beyond militants from neighbouring Pakistan, India faces a key security risk from its myriad homegrown insurgent groups.
Terrorism insurance is a part of India's growing financial services industry. The country's high savings rate - currently 34 per cent and expected to touch 35.3 per cent next year - offers the country's financial services sector new opportunities to grow. The US$41bn (Dh150.59bn) insurance industry is among the strongest contributors to the sector's growth. India is the world's fifth-largest insurance market and the industry is expected to increase to $66.8bn this year. There are 23 life insurers in India with total assets of 13 trillion rupees
But observers warn terrorism insurance is a risky product for insurance companies. Deciding premiums can be a challenge because terrorist attacks are highly unpredictable and the liability after damage assessment can be enormous.
Insurance companies typically charge industrial establishments a premium of 0.3 per cent of the total sum assured, while individuals are charged 0.1 per cent. It typically covers only property destroyed or damaged in a terrorist assault. The maximum claim for property damage is 7.5bn rupees. Terrorism insurance is usually sold for an additional cost as an inbuilt cover in products such as life insurance or personal accident policies. Life insurance covers loss of life due to a terrorist attack.
But given the surge in demand, insurance companies are contemplating selling terrorism insurance as individual policies.