INSURANCE COST PER UNIT OF ELECTRICITY GENERATED

Is compares the insurance cost per unit of power generated as an appropriate tool to be used by power-generating and distributing companies. When we analyze the insurance spending per million units sold by various power plants, we find a huge difference.

Why is there such a huge difference?

The basic reason is the extent of Insurance Coverage. Let us look at the main aspects of coverage which can differ.

Reinstatement Value Coverage vs Market Value Coverage

Some of the insured’s cover on Market Value.

Market Value = New Replacement Value – Depreciation

For old plants, depreciation can be as high as 50%. Hence, the sum insured is 50% lower, and hence insurance spends 50% lower (even for a similar capacity plant).

In Reinstatement Value coverage, the Sum Insured is a new replacement value without deducting depreciation. In case of a Loss, the new replacement value of machinery and/or building is paid by the insurance company. However, for an insured covering on Market Value, the depreciated value will be paid. In case of 50% is depreciation, the claim payable gets reduced by 50%.

Secondly, even if two insured’s are taking on Reinstatement Value, some insured’s do a proper valuation of their assets to arrive at the replacement value. Some insured’s insured based on the original purchase price. The original purchase price could be lower by 50% or more for old plants. Hence, their insurance spend will be lower. However, in case of a claim, such insured’s will get penalized by Under Insurance.

Fire Insurance vs Industrial All Risk Insurance

Some of the insured’s buy Fire Insurance while others buy Industrial All Risk Insurance (IAR). IAR policy cost can be many times the cost of a fire insurance policy. This is because the IAR policy cover is very wide. It covers everything that the fire insurance covers but covers much beyond. The additional coverages available include:

a)      Machinery Breakdown Insurance for electrical and mechanical machinery

b)      Electronic Equipment Insurance for your Electronic Equipment

c)      Boiler Explosion, Implosion, and Collapse coverage for your boilers

d)      Burglary Coverage

e)      Loss of profits insurance wherein loss of gross profit (net profit plus fixed expenses) as well as Extra Expenses stand covered. This is a true balance sheet protector.

Machinery Loss of Profits (MLOP) Coverage

Even if both the power generators are buying the IAR policy, one may opt for coverage for MLOP while the other opts out of the coverage. The premium for MLOP is very high. However, the breakdown of turbines, generators transformers has a moderate probability. This can result in more than a year of interruption resulting in loss of gross profit of a year. If MLOP is opted for, the same stands covered and the balance sheet stands protected.

Add-on Coverage’s opted

Add-on coverages opted for can increase the premium outgo. Examples of add-on coverages that can result in substantial additional premiums include contingent business interruption coverages like Denial of Access, Supplier’s extension, public utility extensions, etc.

Terrorism coverage is opted can also result in a substantial increase in insurance spend.

Location of the Plants

If a plant is located in the highest earthquake zone, the earthquake premium could be 10 times the premium for a plant located in the lowest earthquake zone. Similarly, a plant located on the eastern coast of India may pay a substantially higher premium for Cyclone cover. Plants exposed to flood may pay substantially higher premiums.

Insurance coverage for Employees

Some insureds buy Group Health only for Employees and Spouses while others buy for children as well as parents. Some buy Group term insurance and Group Personal Accident Insurance too. This can substantially affect the premium spend.

Liability Insurance Coverage

Liability insurance like Public Liability and Commercial General Liability. Directors and Officers Insurance. Public Offering of Securities Insurance, Cyber Insurance can result in a substantial increase in insurance spend.