IRDA panel for cutting compulsory cession to 5%

A key committee of the insurance regulator has suggested halving of the compulsory reinsurance that Indian companies place with public sector GIC Re. This will create a larger business space for private and foreign reinsurance firms in the country.

The Reinsurance Advisory Committee of IRDA has suggested that domestic general insurers will now need to park only 5 per cent of their reinsurance business with GIC Re. This is, however, still short of what the general insurers want. They are clamouring for a complete phase-out of the decade-long practice of obligatory cession to GIC Re.

This will also benefit GIC Re as obligatory segment brings more losses for it. Although the business brings in an assured income for the national reinsurer, it also has to pay the claims in equal proportion. The committee has now recommended a reduction in compulsory cession from 10 per cent to 5 per cent. Irda will have to take the final call now, said the chairman of a leading general insurance company, who preferred anonymity.

According to GIC Re, the losses it has suffered due to obligatory cession of the business are pegged at Rs 4,537 crore for last five years. Even on an accounting year basis, the claims out of the obligatory cession have not fully developed as yet and the figure for the same five year period is an alarming Rs 2,015 crore, said AK Roy, CMD, GIC Re.

The question that arises then is why does GIC want cession to continue? We have been suffering losses from the obligatory segment in the past few years. So, when we have stood with the market in the bad years, why should we leave it when the market is turning around? Though we do want to come out of the obligatory segment gradually, we want to (first) recoup our accumulated losses, Roy argued. As general insurers were bleeding with underwriting losses, such 10 per cent obligatory business had become a liability for GIC Re in the previous year. The compulsory cession was 20 per cent earlier which was brought down to 15 per cent in 2007 and 10 per cent in 2008.

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