Tax break likely for fund to cover terrorism risk

New Delhi, February 10: | Updated: Feb 11 2002, 05:30am hrs
The forthcoming budget may confer tax benefits on a catastrophe reserve fund providing cushion to domestic units on anti-terrorism risk within India. Simultaneously, authoritative sources said, the insurance regulator is working out a broad definition of terrorism.

The move follows the reluctance of reinsurers to extend terror cover to insurers worldwide. If at all they agree, they are quoting exorbitant rates.

Sources said the definition would be wide in scope, covering a wide variety of possible terrorist actions. However, the fund would be available in case of major natural disasters like earthquakes as well. That was because reinsurance rates for catastrophe cover too had hardened with the occurrence of the Orissa cyclone followed by the Gujarat earthquake, the sources pointed out.

Reinsurers have been refusing terror cover worldwide post-September 11. This has put industrial majors in a fix, and governments are hastening to reassure their respective markets.

In line with these developments, there is now a move to build up a permanent catastrophe reserve by formalising the 10 per cent surcharge imposed on fire and engineering insurance imposed from September 28 last year.

It is another matter that insurers have not yet put aside the funds accruing from this surcharge into separate accounts for the purpose. The companies were expected to declare the size of their pool on this score in their end-of-the-year accounting, the sources said.

The companies had been asked to create individual catastrophe funds for meeting any eventualities. The funds are to be drawn on only in case an insurers net loss was more than 5 per cent of its gross premium or Rs 50 crore, whichever is less.

The proposed national fund would be managed by the General Insurance Corporation (GIC). The fund has been debated on for some years now, but the denial of reinsurance for terrorism covers post-September 11 has forced the government into definitive action.

The proposal now before the finance ministry envisages pooling of the surcharge collections into the catastrophe fund. Claims would be paid out only in case of major damage arising out of terrorist action or natural calamities that the domestic insurance industry cannot provide for.

The 10 per cent surcharge was expected to raise a corpus of about Rs 300 crore in a full year. The modalities of setting up and administering the fund would be worked out as soon as the governments thinking on tax breaks is made clear, the sources added.