January 20, 2022 3:32:06 am
In a move that will further boost the business of foreign reinsurers in India, insurance regulator IRDAI has reduced the percentage of obligatory cession from the domestic general insurance industry for state-owned GIC Re to four per cent from five per cent.
Obligatory cession refers to the part of the business that general insurance companies have to mandatorily cede to the national reinsurer GIC Re.
The size of the Indian general insurance market was over Rs 2 lakh crore in 2020-21. It has been growing at over 15 per cent in recent years except for the last two years when it has faced many challenges due to Covid-19 pandemic and has grown within 10 per cent single digit. The approximate size of the Indian reinsurance market is around Rs 55,000 crore in FY2020-21.
The new quantum of obligatory cession, that will be effective from April 1, 2022 has been notified by the government on Monday. Domestic general insurers will have to cede 4 per cent of their premium to GIC Re on every general insurance policy they sell during next financial year.
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“The percentage cession of the sum insured on each general insurance policy to be reinsured with the Indian reinsurer(s) shall be 4 per cent in respect of insurance attaching during the financial year starting April 1, 2022, till March 31, 2023, except the terrorism premium and premium ceded to Nuclear Pool, wherein it would be made ‘nil’,” the IRDAI said.
The entire obligatory cession has to be reinsured with GIC Re, IRDAI said.
The reduction of just one per cent obligatory cession would not make any difference to GIC Re as the overall general industry pie is growing every year. “Despite GIC Re having a mandatory obligatory cession, foreign reinsurers including Munich Re, Swiss Re, SCOR and Allianz have been growing their market shares in India efficiently,” said an analyst.
To begin with, obligatory cession was 10 per cent which was reduced to five per cent afterwards and the foreign reinsurers which are having branches in India are demanding the total removal of the obligatory cession for GIC Re to create a level playing field in the Indian reinsurance market.
There are currently 10 global reinsurers which have set up branch operations in India for the last three years.
There would be no limit on sum insured applicable for the cessions made during the period from April 1, 2022 to March 31, 2023. GIC Re may require the ceding insurer to give immediate notice of underwriting information of any cession exceeding an amount as specified by the former. The ceding insurer has to inform the GIC Re at all times whenever the cession exceeds such specified limits, IRDAI said.
The percentage of commission on obligatory cession for different classes of business will be: minimum five per cent for motor third party and oil & energy insurance, minimum 10 per cent for group health insurance, minimum 7.50 per cent for crop insurance and average terms for aviation insurance, minimum 15 per cent for all other classes of insurance business.
GIC Re will also share the profit commission on a 50:50 basis, with the ceding insurer based on the performance and surplus of the total obligatory portfolio of the ceding insurer, after factoring the incurred loss percentage (to be worked at the end of 3 financial years), management expenses at 2 per cent, profit at 5 per cent, commission at 15 per cent and loss ratio at 50 per cent to 78 per cent. No profit commission is payable if the loss ratio exceeds 78 per cent and profit commission cannot exceed 14 per cent.
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