Banks fear hike in credit card air-accident insurance costs

Raghu Mohan

Mumbai, Oct 3: The local credit card industry is set to be hit by a huge hike in costs towards air-accident insurance cover.

Sources in leading credit card issuing banks were categorical that leading insurance players in this segment like New India Assurance and National Insurance are expected to hike premiums payable by banks to them for this cover at the time of renewing annual pricing contracts, following the ill-fated events in New York and Washington. “The insurance bodies have not yet intimated us on this, but we do expect the costs to get reworked at the time of the annual review,” a senior retail banker said.

Costs toward insurance covers, in general, bundled with credit-cards account for 9 per cent of the annual fees charged on cards. This on an average hovers at Rs 800-900 across cards of all propriety and segmentation — “Classic”, “Executive” or “Gold”.

On an industry level, insurance amounts to about Rs 450 crore, given an estimated card-base of five million. Of this, Rs 225 crore or about half, goes towards air-accident cover, which is the costliest component.

The cost of providing air-accident shields on credit-cards by banks have remained largely static over the last few years with annual perk-ups at less than 20 basis points. Hijack-cover costs also did not go up after the Kandahar hijack of an Indian Airlines flight in 1999.

The premium paid to the insurance company by the card-issuer is accounted for under the annual fee collected from cardholders. This enables banks to provide a slew of insurance-linked offerings along with a credit-card on better pricing terms rather than a costlier one, if sought individually by cardholders on a piecemeal basis. Annual credit-card fees, which have been declining over the years, could buck the trend or hold firm if there is a substantial hike in insurance costs, say retail bankers.

These changes, sources say, can adversely affect credit-card issuing costs for banks. “The worst hit will be the relatively newer entrants and those who are about to do so given that card-spends are rather poor, and in the initial few years, investments are high in branding, marketing, technology platforms and merchant-acquiring,” a retail banker with a multinational bank said.

Recent estimates show that the average card-spend — be it of a franchisee on the Visa International or MasterCard International payment loops — is at the Rs 17,000 a year level.

Among banks which have a credit-card launch in the pipeline are HDFC Bank and ABN Amro Bank (announced, but not yet operationalised), the packleaders being Citibank, Standard Chartered Grindlays followed by the likes of SBI Cards, HSBC, American Express and Bank of Baroda.