The Reinsurance Expert Committee (REC) appointed by the Insurance Regulatory and Development Authority of India (IRDAI) has proposed that the stipulation of order of preference for reinsurance cessions — or compulsory cession of business to Indian reinsurer — could be waived for certain classes of business.
If implemented by the regulator, this provision is likely to hurt public sector GIC Re — the beneficiary of compulsory cession — and benefit private and foreign reinsurers, industry officials said.
The panel, headed by M Ramaprasad, said in its report that “there is merit in the representation of life reinsurers seeking waiver from order of preference stipulations, given the consultative and long-term risk management relationship between the Life insurer and a reinsurer.” The committee said aviation, life insurance, marine hull, large infrastructure projects petrochemical and refinery plants, large power plants, oil and energy, specialised/ emerging / volatile risks with high loss potential as well as retrocessions, rely on international reinsurance market for design of the covers, wordings, conditions, capacity, and support.
Insurers and reinsurers require the flexibility to obtain best terms and reinsurance support from reinsurers with high security ratings, it said. “Stipulations of order of preference for reinsurance cessions can be waived for these classes of business and for such other classes of business as may be permitted by the IRDAI from time to time,” it said.
The cession for last financial year was at five per cent of the sum insured, on each general insurance policy to be reinsured with Indian reinsurers. This means 5 per cent of the fixed percentage of the total risks will have to be reinsured with the national reinsurer (GIC Re). “The dilution/waiver of order of preference can hurt GIC,” said former IRDAI member K K Srinivasan.
The REC has proposed that reinsurers should be classified into two categories for offer of participation in the following order of preference: GIC Re and then (simultaneously to other) Indian reinsurers, cross-border reinsurers (CBRs), if any, whose terms for a minimum line size (say 5 per cent for treaty and 10 per cent for facultative risks) established the best terms, foreign reinsurance branches (FRBs), Lloyd’s India and Indian insurers.
The second category will be reinsurers in Special Economic Zones (SEZs), joint venture partners of Indian insurers, reinsurers and other CBRs satisfying the eligibility criteria above (including overseas reinsurance entities of FRBs’ parent group).
In another measure aimed at curbing alternative risk transfer (ART), the committee had recommended that “only structured reinsurance proposals satisfying risk transfer tests that may be prescribed by the IRDAI can be permitted at this juncture”. The IRDAI “may not allow/ consider alternative risk transfer instruments involving capital markets. Such proposals would need discussions and co-ordination with other capital market regulators like RBI and Sebi,” it said.
“The recommendation on ART can also land GIC in trouble. The committee seems to uphold the IAIS core principle that only ARTs with meaningful risk transfer should be treated as reinsurance. I think the reference on ART is the result of the government reportedly raising serious objection to GIC placing expensive ‘funding covers’ abroad and treating them as reinsurance,” Srinivasan said.