MASTER CIRCULAR ON REINSURANCE
CA Chandrasekaran Ramakrishnan
Technical Consultant, Reinsurance Practitioner, Member, Reinsurance Advisory Committee of IRDAI
MASTER CIRCULAR ON REINSURANCE, 2024.
The Regulator has on 31 May 2024 issued a Master Circular on Reinsurance, 2024.
The above Master Circular contains two Parts – Part I and Part II. The Part I of the circular contains three Chapters I, II and III. Chapters II and III have one Appendix each.
Impact of Part II of the Master Circular on Cross Border Reinsurers in India
The Indian insurance sector stands at a critical juncture, poised for significant growth driven by infrastructural development and industrial expansion. In this context, Cross Border Reinsurers (CBRs) play a pivotal role by bringing much-needed reinsurance capacity and facilitating the fundamental principle of insurance, which is risk spreading. However, Part II of the Master Circular, which deals with CBRs, introduces several guidelines that may inadvertently hinder the sector's growth and operational efficiency.
Importance of CBRs
CBRs are instrumental in providing capacity for facultative business, which is currently in short supply due to stringent terms and conditions. They also participate, albeit to a lesser extent, in treaty businesses with many Indian insurers. The support from CBRs is crucial for the Indian insurance sector, especially as it gears up for substantial growth. By diversifying risk and providing specialized expertise, CBRs enhance the stability and resilience of the market.
Financial Strength and Collateral Requirements
Ensuring the financial strength of CBRs to meet their obligations is essential. This is the rationale behind the guidelines mandating collateral in the form of Letters of Credit (LoC) or Premium Reserves. However, these requirements present significant challenges:
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Regulation on Retention and Market Constriction
The regulation requiring CBRs to retain 50% of their Indian business poses additional challenges. This stipulation is likely to constrict the available reinsurance market for Indian insurers, reducing their access to the technical expertise that CBRs bring. Moreover, many specialized reinsurers, particularly those dealing with niche areas such as cyber risks, product recall, and aviation liability, might lose interest in the Indian market. Exempting CBRs from this retention requirement, at least for facultative business, would be a more pragmatic approach. This would ensure that the market retains access to specialized reinsurance support without being unduly constrained.
Determining Outstanding Claims and IBNR Reserves
A particularly complex aspect of the guidelines is the requirement for LoCs to cover the aggregate of outstanding claims liabilities and Incurred But Not Reported (IBNR) reserves. Determining these amounts at the beginning of an annual reinsurance contract is impractical. Outstanding claims and IBNR reserves fluctuate, making it difficult to set an accurate LoC amount. Additionally, it is unclear why a new CBR entering an insurer's panel should provide collateral for liabilities that may have accrued under different reinsurers. The guidelines lack clarity and practicality in this aspect, potentially deterring new CBRs from entering the market.
Comparison with Foreign Reinsurance Branches (FRBs)
The intended regulation seems aimed at bringing CBRs on par with Foreign Reinsurance Branches (FRBs). However, this approach may cause discontent among insurance companies and ultimately harm the industry. The high reinsurance rates have attracted new reinsurers, providing additional capital and support. In the event of a large catastrophic loss, the support from CBRs will be crucial. Restricting their operations could lead many CBRs to exit the Indian market, leaving the sector vulnerable.
Evaluating CBR Performance
The current regulatory approach does not specify how CBRs have underperformed in settling losses. A more targeted strategy would involve identifying and addressing the specific CBRs that have fallen short in their obligations, rather than imposing broad restrictions. This would ensure that only the non-compliant entities are restricted, allowing the market to benefit from the presence of reliable CBRs.
Conclusion
While the intention behind the Master Circular is to ensure the financial robustness of CBRs and protect Indian insurers, the practical implications of these guidelines could be counterproductive. By imposing stringent collateral requirements and retention mandates, the regulations risk reducing the market's access to essential reinsurance capacity and expertise. A more balanced approach, involving clear guidelines and exemptions for specialized facultative business, would better serve the industry's growth and stability. Engaging with stakeholders to address these concerns and refine the guidelines will be crucial in maintaining a healthy and supportive reinsurance market in India.
Technical Consultant Worked with Cholamandalam Ms Gen Insurance, New India Assurance co. Ltd
6moSir as usual you have demystified and summarised with clarity the issues in the reinsurance master circulars. I cannot agree with you more on the need for evaluation of performance of CBRs by the regulator and need for removing the minor transactional barriers like tax treatment and premium withholding etc.But the intention of the regulator is clear as they would like Indian insurers to build domestic capacity and also encourage Indian reinsurers.As you yourselves know specialised reinsurances like cyber may require support of CBRs in terms capacity but on stiffer terms.But when the market expands and there is enough premium I am sure none of these transactional issues would be a barrier.In terms of technical support, the same should be taken care of by the Indian insurance partners and some of them are world leaders in reinsurance like MunichRe Zurich etc.Interestingly happy to share that one such insurer whilst evaluating a client for a cyber insurance declared the risk is robust after he tried and failed in hack attempts and data breaches!! I am also confident that CBRs who come here as long term players would not crib on these frivolous transactional issues but support this expanding market.
Consultant @ New Era Insurance | Risk Management | Insurance Portfolio | Compliance | Claims | Underwriting | Policy Development | Financial Risk Analysis | Crisis Management | Vendor Negotiation | Team Management
6moI am not sure how much is the treaty limit for various lines of business in GIC Re . While Property, Engineering, Marine and Liability lines have adequate treaty limits, yet Speciality products like Oil and Energy, Aviation, Cyber, Surety bonds, etc are classes where reinsurance capacity is not commonly available except in Speciality markets like London, Singapore, Dubai or US. The global premiums generated by these specialties markets do not justify providing Treaty capacity to markets like India where the premiums generated locally are insignificant. Hence there is compulsion to depend on Foreign markets to provide the RI capacity.
Technical Consultant, Reinsurance Practitioner, Member, Reinsurance Advisory Committee of IRDAI
6moAnother important point is when the withheld premium is separately invested by the insurers, any interest earned there on goes to the credit of the reinsurers. So, the withholding tax deducted (TDS) has to be separately dealt with by the CBRs, the unnecessary tax compliance for them.
Chartered Engineer, Insurance Broker, Consultant & Certified Arbitrator
6moValid points, some of which I had articulated earlier in a post. I think there is a regulatory obsession with increasing retention of premium writhin the country. There are limits to which capacity can be created for each and every line of business. For specialised lines of business like cyber, trade credit, surety, etc., the domestic premium generated would be insufficient for capacity building and one may have to depend on cross border reinsurers. In specialised lines, the Indian market needs CBR’s more than they need the market.