Insolvency professionals race for indemnity cover as bad loan resolution process begins
MUMBAI: Insolvency professionals are rushing to buy indemnity covers to protect themselves as they kick off the resolution process under the Insolvency and Bankruptcy Code (IBC).
The only glitch—general insurers do not offer insurance for an insolvency practitioner and modalities are being worked out for at least 15 deals that are close to being finalized, said insurance companies and brokers.
An indemnity cover is meant for professionals to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional services. However, these are mostly availed by doctors, engineers, lawyers and chartered accountants.
In the absence of a specific product, the industry has two options, said Sasikumar Adidamu, chief technical officer (non motor) at Bajaj Allianz General Insurance Co. Ltd.
One is to incorporate an insolvency practitioners’ liability as part of the existing plans. The other is to create a new product, which is a time-consuming affair.
“If you need to create a product, you need to get support of reinsurers and run the product through the regulator and get the product approved. We are pursuing both the options,” said Adidamu.
The insurance industry sees an opportunity in this emerging practice. According to the Institute of Company Secretaries of India, over 100,000 cases (many of them pending with Debt Recovery Tribunals now) will be tried under the IBC, leading to a spurt in the number of insolvency practitioners as well.
Currently, there are at least 100 cases being tried and the Reserve Bank of India has identified 500 large stressed accounts in total that could go under the IBC if banks fail to finalize a resolution plan within six months.
The need for an indemnity cover becomes essential as the insolvency professional can be held responsible for mismanaging the company.
But insurance brokers such as Marsh India, which is currently working with several insurers to design an indemnity cover, believe insurers are themselves hesitant to provide a cover for insolvency professionals—since these are individual, whereas a different set of data points are needed to assess risk.
“When we talk to different stakeholders, what we see is that the biggest hitch is not with the product or risk, but since rules in India expect individuals and not professional services firms to do this work, it’s difficult to estimate what kind of claims are going to come, where the claims are going to come from and what is quantum of claims,” said Anup Dhingra, senior vice-president at Marsh India.
Another sticking point is the low amount of so-called deductibles that are currently being proposed. Deductibles refer to the threshold limit only beyond which insurance would kick in. In other words, it’s the skin in the game for the insured.
“In Marsh’s experience, globally these policies carry meaningful levels of deductibles, but in India since insolvency practitioners are individually exposed, large deductibles may not be acceptable,” said Dhingra.
That, in turn, makes it unattractive for insurance companies to provide this cover.