In life insurance business, India ranked 9th among the 156 countries. During 2010-11, the estimated life insurance premium in India grew by 4.2 per cent. However, during the same period, the global life insurance premium expanded by 3.2 per cent.

The share of Indian life insurance sector in global market was 2.69 per cent during 2010, as against 2.45 per cent in 2009. As per World Insurance Report published by reinsurance major Swiss Re, the global insurance premium for the calendar year 2010 was USD 4339 billion, which is 2.7 per cent higher than USD 4109 billion reported during the previous calendar year 2009.

The share of life insurance business was 58 per cent in total premium collection. While life insurance business collected USD 2520 billion as premium, the same for non-life business was USD 1818 billion. During 2010, the premium in world life insurance business increased by 3.2 per cent on the back of double digit growth (i.e. 13 per cent) in life insurance premium collection in emerging markets.

Life insurance industry recorded a premium income of 2,91,605 crore during 2010-11 as against 2,65,447 crore in the previous financial year, registering a growth of 9.85 per cent.

While private sector insurers posted 11.04 per cent growth (23.06 per cent in previous year) in their premium income, LIC recorded 9.35 per cent growth (18.30 per cent in previous year). The renewal premium accounted for 56.66 per cent (58.60 per cent in 2009-10) of the total premium received by the life insurers, first year premium contributed the remaining 43.34 per cent (41.40 per cent in 2009-10).

During 2010-11, the growth in renewal premium was 6.22 per cent (15.69 per cent in 2009-10). By comparison, the growth in first year premium was higher at 15.00 per cent during 2010-11 but there is significant decline in growth in comparison to the previous year figure (25.84 per cent in 2009-10).

The contract of life insurance:

It is often said that life insurance is a contract between two unequals – the mighty institution with legal know-how and all other resources at its command on the one hand, and the lay policyholder/claimant without much understanding of law or necessary resources to take on the insurer, on the other.

Recognizing this fact, the primary laws as well as subordinate legislations have included a number of provisions intended to protect the interests of policyholders/claimants. These provisions, which are discussed below have gone a long way in ensuring prompt settlement of all genuine claims.

Section 45 of Insurance Act, 1938 stipulates that no life insurance policy can be called in question on ground of mis-statement of facts after two years from the commencement of policy unless the insurer shows that such statement was on material matter and that the policyholder knew at the time of making it that the statement was false or that it suppressed facts which were material to disclose. Proviso 8 of the IRDA (Protection of Policyholders’ Interests) Regulations, 2002 lays down the guidelines on claims procedure in respect of a life insurance policy as follows:

• A life insurance policy shall state the primary documents which are normally required to be submitted by a claimant in support of a claim.
• Any queries or requirement of additional documents, to the extent possible, shall be raised at one go, and not in a piece-mal manner, within a period of 15 days of the receipt of claim.
• A claim shall be paid or be disputed giving all the relevant reasons, within 30 days from the date of receipt of all relevant papers and clarifications, except where an investigation is warranted in the opinion of the insurer.
• Where an investigation is warranted, the insurer shall initiate and complete such investigation in not later than 6 months from the time of lodging the claim.
• In case of a delay on the part of the insurer in processing a claim, the life insurer shall pay interest on the claim amount at a rate which is 2 per cent above the prevailing bank rate.

Maintenance of solvency margins of insurers

Every insurer is required to maintain a Required Solvency Margin (RSM) as per Section 64VA of the Insurance Act, 1938. Every insurer shall maintain an excess of the value of assets over the amount of liabilities of not less than an amount prescribed by the IRDA, which is referred to as a Required Solvency Margin.

The IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000 describe in detail the method of computation of the Required Solvency Margin.  In the case of life insurers, the Required Solvency Margin is the higher of an amount of fifty crore of rupees (one hundred crore of rupees in the case of reinsurer) or a sum which is based on a formula given in the Act and the regulations framed there under.

In the case of non-life insurers, the Required Solvency Margin shall be the maximum of the fifty crore of rupees (one hundred crore of rupees in the case of reinsurer); or higher of RSM-1 and RSM-2 computed as under:

1. RSM-1 means the Required Solvency Margin based on net premiums, and shall be determined as twenty per cent of the amount which is higher of the Gross Premiums multiplied by a Factor and the Net Premiums. For the purpose of calculation of RSM-1, premium of the last 12 months on rolling basis will be taken into account.
2. RSM-2 means the Required Solvency Margin based on net incurred claims, and shall be determined as thirty per cent of the amount which is the higher of the Gross Incurred Claims multiplied by a Factor and the Net Incurred claims.

What is reinsurance protection?

Reinsurance is a process where the insurance companies protect themselves against major claims. Insurance Companies are into the business of taking risks of individual policies. They take the risk on people’s lives, goods, cars, health, etc.

They also have to pay claims as and when the demand arises.  Insurers are normally financially sound enough to pay claims. But there are limits. An event like the Tsunami or a hurricane may generate claims amounting to crores of rupees, which may put a heavy strain on the reserves of the insurers.

Thus, the insurers protect themselves from situations which are beyond their capacity, by re-insuring the risk with another insurer. If there is a claim, the burden will be shared by the primary insurer and the reinsurers.

This process of again insuring the same risk with another insurer by the primary insurer is called Reinsurance and the companies which take the risk of Re-insurance are called Re-Insurers. There are some companies which are exclusively in the business of Reinsurance like Munich Re, Swiss Re, etc.

In India, the General Insurance Corporation of India is the national reinsurer for General Insurance business. However, there are no companies in India which are reinsurer for Life Insurance.

LIC as reinsurer:

LIC of India traditionally reinsures a small component of its business. During 2010-11, 119 crore was ceded as reinsurance premium (95 crore in 2009-10). Similarly, in the case of private insurers, a small component of the business was reinsured, with group business forming the major component of the reinsurance cessions.

The private insurers together ceded `506 crore (407 crore in 2009-10) as premium towards reinsurance. It may be interesting to view this in the context of the fact that the risks pertaining to the investments component of the unit linked insurance products are borne by the policyholders. During 2010-11, there has been a significant shift towards traditional products in the new business underwritten.

ULIPs must necessarily offer a specified component of risk cover.

Statutory requirement of reinsurance:

Sec. 3 of Insurance Regulatory and Development Authority (Life Insurance-Reinsurance) Regulation, 2000 lay down the  reinsurance provisions as follow:

1. Every life insurer shall draw up a programme of reinsurance in respect of lives covered by him.
2. The profile of such a programme, duly certified by the Appointed Actuary, which shall include the name(s) of the reinsurer(s) with whom the insurer proposes to place business, shall be filed with the Authority, at least forty five days before the commencement of each financial year,  by the insurer. (Provided that the Authority may, if it considers necessary, elicit from the insurer any additional information, from time to time, and the insurer shall furnish the same to the Authority forthwith.)
3. The Authority shall scrutinise such a programme of reinsurance as referred to in sub-regulation (2), and may suggest changes, if it consider necessary, and the insurer shall incorporate such changes forthwith in his programme.
4. Every insurer shall retain the maximum premium earned in India commensurate with his financial strength and volume of business.

The reinsurer, chosen by the insurer, shall enjoy a credit rating of a minimum of BBB of Standard and Poor or equivalent rating of any international rating agency:

Provided that placement of business by the insurer with any other reinsurer shall be with the prior approval of the Authority.

Provided further that no life insurer shall have reinsurance treaty arrangement with its promoter company or its associate/group company, except on terms which are commercially competitive in the market and with the prior approval of the Authority, which shall be final and binding.

Reinsurance programme of life insurers:

The reinsurance programmes of Indian insurers start on 1 April, and within a month every insurer is required to file a copy of their reinsurance treaty for the year with the Insurance Regulatory and Development Authority.

Insurance companies can stay financially secure even in times of turmoil under the care of a reinsurance companies. Insurance companies may go bankrupt after settling major risk coverage. To avoid financial constraints insurers have to seek the services of these companies. The goal is to transfer the risk of to the reinsurer. Companies must secure their portfolio under a program.

The agreement requires the company to pay a premium to the reinsurer. In return the reinsurer covers a portion of losses. Backed by a reinsurer, the company can issue policies of higher value because they are capable of handling more risks. Every insurer needs a comprehensive and efficient reinsurance programme to enable it to operate within the constraints of its financial strength.

This is important to maintain the solvency of the insurer and to ensure that the clauses on claims are honoured as and when they arise. Hence the IRDA has stipulated that every insurer shall obtain the approval of its Board for its reinsurance programme. The regulatory framework also provides for filing of the reinsurance programme for the next financial year with the Authority at least 45 days before the commencement of the said year.

The insurers are further required to file the treaty slips or cover notes relating to the reinsurance arrangements with the Authority within 30 days of the commencement of the financial year. These measures highlight the importance attached to the existence of adequate and efficient reinsurance arrangements for an insurance company. It would be recalled that the solvency position of an insurance company is assessed on a “net of re-insurance” basis.

Monitoring of reinsurance:

Reinsurance business is placed globally. When there is a major calamity giving rise to claims of millions of rupees, the claim would affect several insurers all over the globe through the system of Reinsurance. It will not be restricted to only one insurer.

The process of Reinsurance works like insurance itself. Insurers would have to pay ceding premium to reinsurers for covering their risk and in turn they would receive ceding bonus from them. Thus, the concept of Reinsurance had been incorporated only to protect the insurers against major claims. The mandate to the Authority in respect of reinsurance lies in the provisions of section 14(1) and 14(2) sub section (f) of the IRDA Act, 1999 as well as sections 34F, 101A, 101B and 101C of the Insurance Act, 1938.

In addition, the Authority has framed regulations pertaining to reinsurance by both life and nonlife insurers which lay down the ground rules for placing reinsurance with the reinsurers. Under the provisions of the Insurance Act, 1938, the General Insurance Corporation of India has been designated as the “Indian reinsurer” which entitles it to receive obligatory cessions of 10 per cent from all the direct non-life insurers. The limits have been laid down in consultation with the Reinsurance Advisory Committee.

GIC Re:

The GIC of India was approved as the “Indian Reinsurer” on 3 November 2000. As the “Indian Reinsurer” GIC has been giving reinsurance support to all Life and General Insurance Companies.

The Corporation has commenced full-fledged life reinsurance operations from 1 April 2003. It continues its role as a reinsurance facilitator by managing marine hull pool and terrorism pool on behalf of Indian Insurance industry.

The reinsurance programme of GIC aims at optimising the retention within the country and developing adequate reinsurance capacity. The Corporation has its presence in foreign reinsurance business through its representative offices at London and Moscow.

Apart from reinsurance business, GIC continues to participate in the share capital of Kenindia Insurance Company Ltd., Kenya and India International Insurance Pvt. Ltd., Singapore. The Corporation has subscribed to 30 per cent of the holdings in the initial share capital of LIC (Mauritius) Offshore Ltd., a joint venture Company promoted by LIC of India in Mauritius.

High value life policies:

GIC is working on a plan to reinsure part of the high-value life policies taken out by celebrities like Shah Rukh Khan, Sachin Tendulkar, Madhuri Dixit or Subhash Ghai. All these celebrities have taken out life insurance policies running into crores. GIC is looking to reinsure part of the high value risk of LIC’s life policies that are usually reinsured with overseas majors like Swiss Re or Munich Re. LIC sells a host of high-value policies under its various plans.

The upper end of the high value policies may go up to crores and are normally taken by celebrities including filmstars, sportspersons or businessmen. LIC’s retention limit for underwriting life risks is up to Rs 40 lakh for all standard life policies. This essentially means the life insurer can underwrite risks up to this limit. Beyond this, the entire amount is reinsured overseas. GIC expects to step in here.

For any life insurance policy above Rs 40 lakh and running into crores, a part of it can be diverted to the Indian reinsurer. It may begin on a modest note and then translate into larger limits at a later stage. There may be no obligatory clause, however, for reinsuring life policies. The domestic reinsurer has kept its options open of communicating with private life companies too once this becomes a good business proposition. In case of reinsuring life policies, there needs to be a separate accounting and investment format.

Electronic reinsurance platform:

IRDA is working on an electronic format for life insurance policies, which it expects to be perfected by the beginning of the next financial year (April 2012- March 2013). Stock Holding Corporation, Central Depository Services Ltd, NSDL, Karvy Computers and Computer Age Management Services are already working with the insurers and the regulator to put in place the procedure.

The proposed electronic re-insurance platform will have to be mandatorily used by insurers and Indian reinsurers as well as foreign reinsurers operating in India. A demat policy will also help customers as they are saved from the hassles of producing proofs each time a policy is bought. It would also help insurers save on stationery, time and labour.

It would take steps to introduce an electronic re-insurance platform for insurers – both Indian and foreign.”The entire operation on the reinsurance side will be done through this particular platform once it is in place.”

IRDA had taken up an ambitious programme of designing an exchange or an inter-faceted, interlinked, electronic platform, on which reinsurance broking transactions would be executed.

The Indian insurance market conventionally focused around life insurance until recently, a various range of other insurance policies covering sectors like medical, automobile, health and other classes falling under general insurance came up, generally provided by the private companies.

The life insurance of India added 4.1% to the GDP of the economy in 2010, an immense growth since 1999, when the gates were opened for the private company in the market. Life insurers work in a dynamic environment: medical progress, demographic trends and changing lifestyles constantly give rise to new risk landscapes.

This demanding situation is made even more challenging by stricter laws and regulations and ever tougher competition. Any company that hopes to meet these challenges must continually develop its business model and steadily optimize its deployment of capital. First-rate risk management is the main pillar supporting long-term profitable business development.

In view of keen competition and current rating and solvency requirements, active capital management is becoming ever more important Life insurers therefore have greater need than ever before for effective and economically attractive instruments that allow them to react flexibility to the specific challenges posed.

The purpose of life reinsurance is to enable an insurance company to transfer to another insurer a portion of the risks assumed in connection with the issuance of a life insurance policy or annuity contract. Through the vehicle of life reinsurance, the company issuing the policy can increase its capacity to insure large individual and aggregate risks of the business of life insurance.

By: Mr Jagendra kumar, Corporate Head (Training), Shriram General Insurance, Published in Life Insurance Today, April, 2012