REINSURANCE LIBERALISATION IN INDIA: WILL IT MAKE INDIAN INSURANCE MARKET SUSTAINABLE ?
With huge opportunity in India and rapidly growing middle class and a comparatively low insurance density relative to other national economies, India constitutes an attractive market of the future for many re-insurance companies. The Insurance Regulatory & Development Authority of India gave approval to Reinsurance Group of America (RGA), which specialises in the life and health sector. Thereafter five more reinsurance companies have been granted final licence by the IRDAI. The companies are Swiss Re, Germany’s Munich Re and Hannover Re, France’s Scor and the locally incorporated ITI Reinsurance, which is part of the Fortune Financial Services group. This takes the tally of reinsurers in the country to six. Besides the six which have set up shop, Lloyds of London and Berkshire Hathaway’s General Reinsurance have completed the first stage of their application, while XL Reinsurance has received an in-principle nod. The entry of foreign reinsurers in India will result in insurance companies being able to provide more specialised covers to corporate, including liability risks and cyber risks. The move will also increase the country’s capacity to write large insurance policies. GIC Re, with a turnover of `18,435 crore in 2015/16, handles around 52 per cent of the total reinsurance business in the country. The rest is already spread across global reinsurers, but with many of them now expected to set up branches in India, the business is likely to get a big fillip. Following the amendment, IRDAI, in October 2015, released guidelines on the registration and operation of foreign reinsurers in India.
The reinsurance industry in India is estimated at Rs 20,000 crore. Until now, GIC Re (General Insurance Corporation of India) has had a monopoly for nearly 16 years after the industry was opened up. The reason for the sudden spurt in the number of multinational reinsurance companies coming to India is a change in legislation. The corporation did well this year in terms of top line because of growth in premium from non-life companies due to the government’s crop insurance scheme. Earlier, global reinsurance companies could do business within India only by incorporating locally as a joint venture where they would be minority partners. Under the amended insurance legislation, they can function as branches without having to incorporate locally in the same manner that foreign banks do business. Meanwhile, ITI Reinsurance has emerged the first private reinsurance company in India. The new company would have a capital base of Rs 500 crore and focus on all segments of non-life reinsurance. Reinsurance companies provide cover to domestic insurance companies and enable them to issue policies where the sum insured is larger than their own balance sheet. In addition, GIC will have a domestic competitor as well, which has been given clearance – ITI Re, owned by Fortune Financial Services. Market participants have greatly appreciated the openness and willingness IRDAI has shown to understand reinsurers’ challenges and create a welcoming environment for their entry.
INDIAN REINSURANCE SCENERIO:
The mandate to the Authority in respect of reinsurance lies in the provisions of Section 14(1)
and 14(2) Sub Section (f) of the IRDA Act, 1999 as well as Sections 34F, 101A, 101B and 101C of the Insurance Act, 1938. In addition, the Authority has framed regulations pertaining to re-insurance by both life and non-life insurers which lay down the ground rules for placing re-insurance with the re-insurers. Under the provisions of the Insurance Act, 1938, the “Indian re-insurer” entitle themselves to receive obligatory cessions as decided every year, from al the direct non-life insurers. The limits have been laid down in consultation with the Reinsurance Advisory Committee with the approval of Government of India. Every insurer needs a comprehensive and efficient re-insurance program to enable it to operate within the constraints of its financial strength. This is important to maintain the solvency of the insurer and to ensure that the claims are honoured as and when they arise. Hence the IRDAI has stipulated that every insurer shall obtain the approval of it Board for its reinsurance program. The regulatory framework also provides for filing of the reinsurance program for a financial year with the Authority at least 45 days before the commencement of the said year. The insurers are further required to file the treaty slips or cover notes relating to the reinsurance arrangements with the Authority within 30 days of the commencement of the financial year. These measures highlight the importance attached to the existence of adequate and efficient reinsurance arrangements for an insurance company. It would be recalled that the solvency position of an insurance company is assessed on a “net of re-insurance” basis.
The Regulations also require that every insurer should maintain the maximum possible retention commensurate with its financial strength and volume of business. The guiding principles in drawing up the reinsurance program have been stated as under:
References:
- Maximize retention within the country;
- Develop adequate capacity;
- Secure the best possible protection for the reinsurance costs incurred; and
- Simplify the administration of business.
- The insurance sector in India is growing at a healthy clip – the life segment at 11.84 per cent in 2015/16, the non-life at 13.81 per cent – against a global average of 4 per cent and 3.6 per cent, respectively, in 2015. There are 54 companies operating – 24 in life insurance, another 24 in non-life, SIX dealing solely in health insurance, and GIC. But the absolute size of the market, at $71.78 billion, is small compared to developed countries, as is insurance density and penetration. The key challenge will be to offer the most relevant and innovative solutions for clients, develop new products and help them grow their businesses.
- The retention ratios of Indian insurers – the portion of the risk they keep to themselves, rather than pass on to the reinsurer – are also relatively high, lowering the scope of reinsurance business. With private insurance only 15 years old, good quality, adequate data for pricing, modelling and underwriting of products is also lacking across the entire insurance value chain. Reinsurers need to work collectively to enhance underwriting standards, pricing and wording of policies. They also need to evolve a transparent dispute resolution mechanism to ensure that the Indian market flourishes in coming years.
- Taxation is another worry for the foreign reinsurers, since there are a number of areas where clarity is yet to be provided – mechanisms for computing business profits of foreign branches, the service tax insurers will have to pay on reinsurance premium, the applicability – or otherwise – of service tax and Goods and Services Tax (GST) on reinsurance brokers, and more. Will Lloyd’s, as a reinsurance market, have to pay GST? To bring the Indian market in line with international norms and enable Indian reinsurers to compete on a level-playing field, the reinsurance business should not attract GST.
- Global reinsurers have been attracted by the potential of the Indian market, but if they are taxed at around 40 per cent, as most foreign entities are – way higher than reinsurers in Singapore or the UAE – they may well limit their investment in India as well as scale down operations in the future if the global economy takes a hit. If the government wants to build a robust reinsurance industry, it has to think of some tax concessions. The doubt related to repatriation of surplus to the parent company by the branches has also not been fully resolved.
- There is also the matter of the “order of preference” that IRDAI has prescribed. It has divided foreign reinsurance branches into two categories – those retaining at least 50 per cent of the reinsurance business they get (while passing on the remaining risk to their parent companies), and those retaining at least 30 per cent. Initially, IRDAI had ruled that the first choice of insurance companies should be an Indian reinsurer, but after strong protests from prospective foreign entrants, has put Indian reinsurance companies and foreign ones in the first category on par. Insurance companies can choose among any of them, but only after offering reinsurance to three companies in this category and being turned down can they move to the second category.
- Cross-border reinsurance – or reinsurance with global companies that have not opened branches in India – will henceforth be allowed only after both categories of foreign branches within India have declined. Even so, much of the nitty-gritty related to “order of preference” has yet to be spelt out, and is being anxiously awaited by foreign reinsurers, who are wondering to what extent the hands of Indian insurers will be tied.
- Global insurers have also been allowed to set up branch offices in special economic zones (SEZs) – called International Finance Service Centres (IFSCs) – but IRDAI has issued a separate set of eligibility criteria and guidelines for these. There is lack of alignment between the reinsurance regulations for the onshore market and the IFSC zone leading to lack of clarity. If India is to develop as a reinsurance hub, this needs to be sorted out.
About the Author
JAGENDRA KUMAR Ex. CEO, Pearl Insurance Brokers 71/143, “Ramashram” Paramhans Marg, Mansarovar, JAIPUR-302020
References:
- IRDA Annual Report 2015-16 ( Data contents)
- http://www.policyholder.gov.in
- Boston Consulting Group (BCG) Report
- http://www.moneylife.in/article
- http://www.businesstoday.in/magazine/features/extra-cover/story
- http://economictimes.indiatimes.com
- Newspapers & Journals
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