Deciphering IRDA’s rules for branch offices of Foreign reinsurance companiesOctober 1, 2017
Ever since the privatization of insurance companies in India in 2000, numerous private insurance companies have emerged in the country. However, the number of reinsurance companies is too scarce to shield private insurance companies. The reinsurance market is limited to the sole player– General Insurance of India (GIC) who holds a majority share and stands at number 14 in the global rankings. Thereby, the opening of the Indian market for foreign reinsurance companies has become imperative.
On February 4th, 2016 an official gazette IRDAI (Insurance Regulatory Development Authority of India) circulated the regulations for the registration and operation of branch offices of the foreign reinsurers in India. With the aim of reducing loss-making risks, the insurance companies cede a portion of the premium they have collected to reinsure themselves.
There is a minimum retention criterion for the foreign reinsurance companies that want to operate in India, which considers the percentage of their Indian reinsurance business as proposed by the regulators. The proportion of retention has been specified based on two categories: 50% for category I and 30% for category II. The Gazette through regulation 28 (9) clause (a) requires the insurer to first prefer an Indian Reinsurer (GIC Re) “and thereafter to those granted certificates of registration under regulation 4 (a)” that require (along with other requirements) minimum retention of 50% of the Indian reinsurance business.
It specifies in the clauses (b), (c) and (d)that requires preference to category II companies to set up the branch of the reinsurer in SEZ’s and that the balance if any, to the Indian insurer and then foreign reinsurer.
The regulation for retention of 50 to 30 percent of Indian reinsurance business seems to contradict the principle of diversification that is required to reduce the risk of potential reinsurance losses by the promotion of concentrated funds. However, it does help the IRDA’s job of providing long-term funds for accelerating the growth of the economy.
Thereby the authority had to compromise between securing the diversification of reinsurance proceeds and long-term funding of the economy through a reinsurance premium. As the IRDA is the ultimate authority, it is fair to think that the retention percentage prescribed by them has struck a right balance between the two.
The only Indian reinsurer, GIC-Re receives a statutory 5% of the general insurance policy; but it is subjected to a limit. The Indian reinsurer has been given the preference not only over foreign reinsurers and those retaining 30% of their reinsurance business, but also the category I reinsurance companies that maintain 50% of their Indian reinsurance business.
This approach is different from the vision of the Insurance Bill, which wants to open the Indian market for reinsurance and keeps GIC Re in a better position than any other reinsurer in India. So, given the prudence of the IRDA, one can be confident that reason backs the decision.
The credit rating and other criteria for GIC Re are not as stringent as others, so giving preference to GIC Re is understandable. Another notable point is that the premium retention criteria have been stated for GIC Re.
The IRDA has evidently assumed GIC Re’s superiority in conducting the reinsurance business in tune with their overall objectives and missions over other reinsurers. The GIC Re is a highly profitable, wholly-owned subsidiary of the government of India which is also responsible for appointing the IRDA’s top officials. This leniency leads many to believe that the regulations are biased.
As an explanation, the regulatory body undertakes a review of the working of these regulations and in particular, the operation as per Regulation 28(9). The order of preference for cessions by Indian insurers after one year based on the reports made on it. Currently, there has been no review of the regulations. So, the final clearance for foreign reinsurers to set up branch offices in India is still awaited. Currently, even though the regulations for international reinsurance companies by the IRDA do match the ones for the local reinsurer, there is hope for it to get leveled in the coming years.