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September 8, 2014
Non-life insurers are upbeat about the agricultural commodity market following proposed new rules by the Forward Markets Commission’s (FMC) requiring warehouse service providers (WSPs) to have full insurance cover for deliverable commodities on futures exchanges.
Insurance coverage for commodities currently accounts for less than 5% of the overall business of the non-life insurance sector. Experts say that if all WSPs took up insurance cover for crops, this might rise to 8% in the next six-eight months.
“Though banks providing finances to WSPs usually take up insurance cover to protect against losses, WSPs taking financial assistance from other private sources are not covered by insurance. With the regulator asking all WSPs to take full insurance cover, there could be an immediate rise of 15-20% in business, especially for state-owned insurers,” said a senior official with a public-sector insurer.
In draft guidelines issued last month, the FMC said that WSPs seeking accreditation with the National Multi Commodity Exchange would have to fully cover the value of goods at exchange-approved warehouses for risks such as fires, floods, cyclones, earthquakes, burglaries, thefts, etc, reported Business Standard.
The WSPs will also need fidelity guarantees and indemnity covers for all stocks deliverable on the exchange. The value of the goods to be insured would be marked-to-market on the replacement value, on an ongoing basis, the FMC said. It is seeking public feedback on the draft guidelines by 15 September.
“With the FMC asking WSPs to take insurance cover for their goods, there will be business opportunities for companies such as ours. Since there is always a risk of losing these commodities to fire, flood and other perils, the mandatory insurance will lead to additional opportunities for insurers,” said Mr Rakesh Jain, chief executive of Reliance General Insurance.
While both private and public-sector general insurers offer covers for commodities, the fidelity guarantee is a new growth area for insurers. In fidelity guarantee insurance, an insurer would indemnify the insured against a direct pecuniary loss due to fraud, etc. The size of the cover depends on the type of commodity being dealt with.