Recently, the Insurance Regulatory and Development Authority of India came out with the draft of the proposed regulations to streamline reinsurance operations in the country. The measures have been interpreted as protectionism by various stakeholders in the industry.
For starters, reinsurance is known as insurance for insurers, which basically means the practice of insurance companies buying protection for their balance sheets against volatility (which means chances of paying hefty sums for claims) due to large manmade and natural catastrophe losses.
Now, those antagonists of the IRDA rules say that the proposed reinsurance regulations should be recast to throw open the choice of approaching reinsurers, Indian or overseas, as would be expedient for the commercial considerations of the insurer seeking support.
The extant regulations aim to ensure that maximum business is retained within the country and preference would be given to Indian domiciled entities — with the first right of refusal lying with the General Insurance Corporation of India (GIC) and then cascading down to foreign reinsurers (FRBs) and other ‘Indian reinsurers’. The spillover should be placed with cross border reinsurers (CBRs), fulfilling certain laid-down criteria.
The history and the market
After its de-nationalisation in 2000, GIC was demerged and became the sole Indian reinsurer. Foreign reinsurers were operating as only servicing offices in India, liaising with Indian market for their parent offices. By default, GIC had preferential treatment in the market but foreign reinsurers had a near laissez faire space.
Doors were opened for FRBs in 2016, after the Insurance Act was amended with stringent pre-conditions obtaining FRB licence. Currently, there are eight such branches including Lloyds and two more are in the pipeline.
The size of the Indian non-life market, which is more reinsurance intensive as against life insurance, was estimated to be Rs. 1.26 lakh crore last fiscal, out of which, nearly Rs. 28, 900 crore is given out as reinsurance premium. Out of this, Rs. 1,1000 crore was sent out to overseas reinsurers — CBRs.
GIC, which has a dominant 60 per cent market share, has been supporting the Indian market to the hilt, even though primary market prices are low, whereas the foreign branches have been cherry-picking — based on the quality and loss experience of business referred to them by Indian insurers.
A heated debate
Now, based on the latest report of The Reinsurance Experts Committee, representing all stakeholders, the IRDAI has released draft regulations, triggering a debate in which the following arguments have emerged. The proposed regulations:
1. Will limit competition, leading to high costs, limited coverage and curtail product innovation. Fact: Indian players retained 90 per cent of all volumes generated in the country in FY 2017, according to the latest Annual Report of the General Insurance Council of IRDAI. Moreover, mass retail sectors such as auto, health and small/medium property businesses are least reinsurance dependant.
Hence, the pricing to the policy holders in these classes are the prerogative of the insurance companies themselves. Indian corporates have always had the best terms in the Indian market given the aggressive top line aspirations of Indian insurers and substantial local capacity available through “coinsurance”.
2. Will result in concentration of risks in the hands of a few reinsurers, affecting the stability of the market. Fact: The proposed regulations do not forbid placing business with CBRs and insurers will still be able to spread their risks in a diverse manner.
The regulations only ensure that locally available capacity is not overlooked resulting in a) foreign exchange being frittered away, and b) any credit risk issues or disputes/defaults between the placing insurer and receiving reinsurer are taken care of by the same regulatory ring fencing.
3. Will help Indian reinsurers hijack terms offered by overseas reinsurers. Fact: The proposed regulations do provide for placing business with CBRs who have a minimum A-rating. If terms from a CBR are credible, India-based reinsurers will accept a share. Hence, there will not be a displacement of cross border reinsurers, instead they will get supported.
4. Will affect diversification of risks across geographies. Fact: Reinsurers manage accumulations in specific geographies through advanced risk transfer methods. This is exactly the reason why the 2017 US natural catastrophes of Harvey, Irma and Maria —together estimated to cost the insurers $93 billion — did not turn out to be a ‘balance sheet event’ but only as an “earnings event”
5. Local reinsurers can plagiarise intellectual property rights of CBRs. Fact: Reputed reinsurers will not resort to the cheap tactics of imitating the product design of others. They indeed set standards for the market — e.g. Lloyds Forms.
6. No level-playing field for CBRs. Fact: A CBR can successfully lead a business as much as a India based reinsurer can , if their quote is deemed as the best by the concerned insurer. The insurer has the right to allocate shares rewarding all on their merits, including CBR
7. Required ratings are pegged to S&P and there are no comparables in other agencies.Fact: There have always been multiple insurance rating agencies — S&P, AM Best, Moody’s etc., and by sheer comparison of hierarchy of the respective grading, one can calibrate rating by one agency against that of the other.
8. Not many major markets impose an order of preference like India. Fact: India is not alone in ensuring exploitation of locally available and secure capacity. Regulators in the US, for example, mandate that the reinsurance bought from overseas is supported by a collateral security executed in favour of the buyer.
In Australia, the regulator imposes withholding charges which dent the solvency levels of such buyers. Indonesia, for one, imposes more forthright preferential treatment of local reinsurers. So does, Brazil. (Source : Business Line)
