IRDAI has maintained the status quo on obligatory cession of business for the financial year 2023-24 at 4 per cent in favour of GIC Re, disappointing the private sector general insurers and foreign reinsurers with operations in India.
The government had notified the move recently saying that the entire Obligatory Cession is to be placed with GIC Re only. Obligatory cession refers to the part of the business that general insurance companies have to mandatorily cede to the national reinsurer GIC Re.
Understandably, private general insurers are against any obligatory cession to GIC Re as it doesn’t give them any freedom to place the reinsurance business the way they like and with the reinsurers they like. The general insurers earn substantial commission out of any reinsurance business they place with the reinsurers apart from the risk cover.
The IRDAI had constituted a panel under Bhargava Dasgupta, MD of ICICI Lombard General Insurance, to suggest measures to phase out obligatory cession and the panel had suggested phase-out the obligatory business along with the right to first refusal by the GIC Re.
Under the right to first refusal, GIC Re has the first right to choose the reinsurance business from the general insurers and then it can be placed with other reinsurers. The obligatory cession was reduced from 5 per cent to 4 per cent in FY23 and the IRDAI, in line with demands of general insurers, had indicated that it will be further be reduced and can even be made zero. “Maybe the government thinks removal of obligatory cession will impact the performance of GIC Re,” said an insurance official.
