The Reinsurance Expert Committee (REC) appointed by the IRDAI has recommended that after GIC Re, insurers are to be permitted to obtain the best terms simultaneously from Indian reinsurers, foreign reinsurance branches (FRBs), Lloyds India and cross-border reinsurers (CBRs) that satisfy eligibility criteria.
In more detail, the REC, appointed in May to review the existing regulatory framework, has proposed that reinsurers be classified into two categories for offer of participation in the following order of preference:
a. GIC Re and then [simultaneously to other] Indian reinsurers, CBRs, if any, whose terms for a minimum line size (say 5% for Treaty and 10% for Facultative risks) established the best terms, FRBs, Lloyd’s India and Indian insurers.
b. Reinsurers in Special Economic Zones, joint venture partners of Indian insurers, reinsurers and other CBRs satisfying the eligibility criteria (including overseas reinsurance entities of FRBs’ parent group).
The REC says that there is merit in the representation of life reinsurers seeking waiver from Order of Preference stipulations, given the consultative and long-term risk management relationship between the life insurer and a reinsurer. The Committee feels that aviation, life insurance, marine hull, large infrastructure projects petrochemical and refinery plants, large power plants, oil and energy, specialised / emerging / volatile risks with high loss potential as well as retrocessions, rely on the international reinsurance market for design of the covers, wordings, conditions, capacity, and support.
“Insurers/reinsurers require the freedom and flexibility to seek and obtain best terms and reinsurance support from reinsurers with high security ratings. The Committee recommends that stipulations of order of preference for Reinsurance cessions can be waived for these classes of business and for such other classes of business as may be permitted by the Authority from time to time,” said the report.
With a view to developing reinsurance capacity/market within India, the Committee recommends that the cessions to all CBRs taken together, by any insurer, shall not exceed a certain percentage as deemed appropriate by the IRDAI. This limit can be reviewed every year, it says.
The REC also says that it would be prudent to prescribe CBR Security rating of A minus or above for competitive quotation process and BBB or above rating for placements. The IRDAI could also consider raising the minimum-Security rating levels for participation to A minus.
Under existing regulations, the order of preference for cessions is:
a) Indian re-insurer(s) having a minimum credit rating from any of the internationally renowned credit rating agencies for the previous three years; and thereafter, the branch office of a foreign reinsurer which shall maintain a minimum retention of 50% of the Indian reinsurance business (such branches are classified as Category 1);
b) other Indian reinsurer(s) or the branch office of a foreign reinsurer which shall maintain a minimum retention of 30% of the Indian reinsurance business (such branches are classified as Category 2);
c) the branch office of a foreign reinsurer set up in a Special Economic Zone;
d) Indian insurers and overseas reinsurers.